Obama’s Bank Tax Flunks on Every Count

When and if we recover from this recession, we are going to have to worry about government debt and deficits. Spending cuts and tax increases will become the priorities of politics. President Obama just gave us a good example of how not to do it.

The president has endorsed a tax on banks by size to collect a projected $90 billion over the next 10 years. The president argues that the tax will help repay taxpayer losses in the TARP bailout program for banks.

It’s a crummy argument. Most of the TARP losses will be racked up not at banks, but at the AIG insurance company and the rescued automakers, GM and Chrysler. No tax for them.

Meanwhile, banks that received not a dime from TARP will be taxed.

I get it that people want to punish banks. Banks lobbied to change laws to allow them to undertake riskier activities. Then when the risks went bad, they begged for public money to rescue themselves. They got it too, and now they are paying their top people huge bonuses to thank them for profits really owed to public generosity.

So the desire to punish is understandable. But punishment is a bad basis for taxation.

The new tax won’t be applied to bonus pools. It will be applied to banks by asset size, meaning based on the amount of lending they do. But of course the big problem of the moment is that banks are not lending nearly enough.

How does it make sense to punish banks for doing more of what we should want them to do? It’s true that the huge expansion of government undertaken by President Obama will have to be financed to the extent it cannot be rolled back.

That financing ought to be done as rationally as possible. It should preserve incentives to work, save, and invest. It should avoid favoring or disfavoring specific industries. It should be cheap to collect. And it should be enacted jointly with reductions in government spending.

President Obama’s bank tax flunks on every count.

Originally aired on NPR’s Marketplace.