A Supply-Side Tax On Banks is Not Preferable

Here is a twist on the Obama bank tax debate…

Former Reagan OMB director David Stockman writes in The New York Times in support of taxing big banks:

While supply-side catechism insists that lower taxes are a growth tonic, the theory also argues that if you want less of something, tax it more. The economy desperately needs less of our bloated, unproductive and increasingly parasitic banking system. In this respect, the White House appears to have gone over to the supply side with its proposed tax on big banks, as it scores populist points against the banksters, too.

I wrote last Friday that the Obama tax didn’t make any sense because it would drive banking operations off U.S. shores, unfair to banks caught in the tax that didn’t even get bailout money, and unnecessary to get a good return on investment. Furthermore:

this tax idea makes little sense, especially in a market that is still trying to find a recovery footing. On the one hand, Washington says they are hellbent on getting the banks to lend to small businesses again. But on the other hand they are preparing to slap a load of unnecessary, detrimental regulatory changes on the Street and proposing to tax the most successful firms.

The more restrictions and claims there are on bank capital, the less lending there will be (not that we necessarily want to back to bubble levels of exuberant lending).

Here is the twist: I am opposed to the tax because I want to see the recovery of the banking industry as it has been a key driver of the economy. Stockman believes the banks have been hurting the economy:

Make no mistake. The banking system has become an agent of destruction for the gross domestic product and of impoverishment for the middle class…. The baleful reality is that the big banks, the freakish offspring of the Fed’s easy money, are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed. This is why the Obama tax is welcome: its underlying policy message is that big banking must get smaller because it does too little that is useful, productive or efficient.

And Stockman holds this view because he sees banks not as private entities but as tools of the government today.

the big Wall Street banks are wards of the state, not private enterprises. During recent quarters, for instance, the preponderant share of Goldman Sachs’ revenues came from trading in bonds, currencies and commodities.

But these profits were not evidence of Mr. Market doing God’s work, greasing the wheels of commerce and trade by facilitating productive financial transactions. In fact, they represented the fruits of hyperactive gambling in the Fed’s monetary casino — a place where the inside players obtain their chips at no cost from the Fed-controlled money markets, and are warned well in advance, by obscure wording changes in the Fed’s policy statements, about any pending shift in the gambling odds.

I have argued before that all bank profits today are essentially because of TARP and monetary policy based supports. There is very little actual growth in the overall banking community right now, so in one sense Stockman is right. Additionally, it is true that without the loose monetary policy of the bubble period the big banks would not have been able to grow as large as they are. But those reasons do not give the government the moral or political right to attack private enterprise.

We have automobile companies because of the roads in the country—largely paid for by taxpayers. Airlines wouldn’t be able to fly without airports, which are largely state-owned in America. And these realities don’t mean we have the right to exert controls over those industries to mold them to our arbitrary standard.

It seems a better remedy to Stockman’s problem seems to be monetary reform, and with that the banks will lose their source of super cheap access to credit without having the government come up with an arbitrary tax amount to try and shrink the banks to some arbitrary size-condition. There are a lot of values to having big banks. The concept is not inherently evil. As such we shouldn’t attack the institutions with fiscal policy, but look to establish a regulatory structure that encourages prudence (such as ending too big to fail)—and that will naturally take care of many of the ills banks face today.