Regular readers know that I have no theological objection to bank taxes. If some kind of FTT proves workable, it could be a good way to close our enormous long-term revenue shortfall. But I do think John Carney of CNBC.com is right to raise concerns about a mystery tax:
Under the new provisions added to the bill, regulators—specifically the newly created Council for Financial Stability—will be empowered to apply the tax according to a “risk matrix” that contains no fewer than 13 factors. Some of these are rather straightforward, such as requiring regulators to consider the size, leverage and reliance on short term funding of a company.
But more than a few relate to goals less strictly tied to financial stability. One of the factors to be considered is a company’s importance as “a source of credit for low-income, minority or underserved communities.” Another tells regulators to consider whether the company is an important source of credit for state and local governments.
The bill does not tell regulators exactly how to apply these factors. It could be that banks that do a lot of lending for low-income communities would be assessed a higher fee, since the failure of those banks would be more likely to result in a bailout by government officials concerned that low-income communities would be deprived of important sources of credit.
But that does not seem likely. Far more likely is that banks that lend in ways approved by the regulators—buying municipal bonds from budget-challenged states or lending to politically favored businesses—will be assessed a lower fee. They will be given credit—rather than penalized—for being an “important source of credit” for these constituencies.
That is, Carney fears that political imperatives might govern which banks are taxed, and how onerously they are taxed. Felix Salmon sees the uncertainty surrounding the proposed bank tax as a virtue:
Carney is worried that we don’t know exactly where the tax will be applied — but that’s a feature, not a bug. Setting up the tax in great deal ex ante is essentially just asking banks to spend millions of dollars on tax consultants who can help them skirt the new levies. And as the risks in the system evolve and change, so to should the way that they’re taxed. It’s right and proper that the newly created Council for Financial Stability will be charged with taxing systemic risk, rather than having a bunch of politicians try to do so at the beginning and then watch as the banks and other financial institutions nimbly sidestep the new taxes.
An increase in the FDIC premium would be a gift on a platter to banks like Goldman Sachs and Morgan Stanley which don’t have insured deposits — not to mention non-bank players like Citadel which are systemically very important. I’m unclear on what exactly this Republican “procedural hurdle” is — I thought that after reconciliation, you just needed a simple majority to pass a bill. But I’m getting very annoyed about it.
Felix has a great deal of faith in the Council for Financial Stability, and he is skeptical about the political process. His argument reminds me of Alan Blinder’s 1997 Foreign Affairs essay “Is Government Too Political?”
Those who say big government is the problem have it wrong. The real problem is that government is pushed and pulled by interest groups and partisan politicking, often at the public’s expense. Washington could learn from independent agencies like the Federal Reserve. Shift responsibility for things like tax policy from the politicians to the experts; besides knowing more, they work in a politics-free zone. Tossing the ball to the technocrats won’t weaken democracy — Congress can always take it back — but it will produce better policy.
I’m surprised that people still have so much confidence in the judgments of experts with centralized authority. Felix is an exceptionally smart writer and thinker, so I’m not inclined to dismiss his view out of hand. But I do think that John Carney makes an excellent point: there is a decent case for limiting the discretion of regulators.
The fact that this proposal was added to the legislation in the wee hours, without very much deliberation, is another fact that should give us pause.
Overall, I don’t know quite what to think about the financial regulation proposal. Note that Senators Russ Feingold and Maria Cantwell are opposed because they don’t think it goes far enough. My crude sense is that the proposal isn’t nearly as consequential as PPACA, and that it will have a marginal impact on the financial landscape. The legislators behind the bill seem to have punted on all of the hard questions, leaving it to regulators to do their jobs well — and with the exception of resolution authority, another can of worms, regulators have the tools they need.