Three Ways to Improve the Bank Tax

Taxing bad things is the fiscal equivalent of the Holy Grail. So, as taxes go, the levy on bank liabilities is quite a good one. By punishing bad behavior — the excess reliance on short-term hot money — it will hopefully encourage better behavior. But to make this tax really good, it needs to be rejigged.

First, the United States needs to be less arrogant if it wants this tax to fly internationally. The Obama administration wants other countries to copy it. After all, a level playing field would stop the U.S. banking industry from being hobbled relative to foreign centers.

And others are interested in following suit. Sweden, which already has a similar scheme, is urging other European Union countries to join in. Politicians in both main UK political parties are also intrigued by the idea.

But the U.S. plan is to tax the worldwide liabilities of its own big banks, and the U.S. liabilities of foreign banks. If other countries did the same, the industry would be hit by double taxation. So the White House needs to show some flexibility. The simplest solution would probably be to let each country tax all the banks that operate in its jurisdiction — but tax only their domestic liabilities.

The second way in which the Obama tax should be improved is by carving out medium and long-term liabilities. Insured deposits are already exempt from the tax. They are relatively stable sources of finance — and, in any case, U.S. banks already pay an insurance fee. But medium and long-term liabilities are also stable. They are a "good" source of funding and, as such, should not be taxed — or, at least, not so heavily.

Finally, the tax should be forward-looking. The political justification for the tax is to recoup the costs of the recent bailout. But relying on hot money is bad for the future, just as much as the past. To change behavior, the levy should be permanent. Of course, given that it is already slated to last for 10 years, that may well be what it becomes.

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