“Tax Them Both”
January 13, 2010, 5:00am

Editorial — The New York Times.

The White House is talking about levying a tax or fee on large banks to recover the $120 billion it spent to bail out the financial system. That is a good place to start, but it shouldn’t stop there. President Obama and Congress should also impose a windfall tax on the huge bonuses that bailed-out bankers plan to pay themselves over the next few weeks.

This is an issue of fairness and sound public policy. The Treasury needs the money. A fee may also get banks and bankers to rethink the way they do business — something the much-promised, far-too-delayed and increasingly watered-down financial regulatory reform effort is unlikely to do. A permanent tax or fee imposed on the nation’s largest banks could reduce future risks by discouraging big banks from getting even bigger.

Let’s be clear, the crisis spawned by banks’ recklessness has cost the country a lot more than $120 billion. Any calculation must also include the deepest recession since the 1930s and the loss of more than seven million jobs. What profits banks have made since then have not come from lending to credit-strapped businesses. They are trading profits made possible by trillions of dollars in cheap financing from the Federal Reserve.

The crisis occurred because banks that had grown too big to fail came too close to failure — driven by a reckless pursuit of risk and profit. Credit froze, and the government was forced to put enormous public resources at their disposal to keep them afloat.

Though all that public money has pulled banks back from the brink, some too-big-to-fail banks have since got even bigger by swallowing their weaker brethren. That means, if they get in trouble, they could wreak even greater havoc on the economy.

A levy on these financial giants would help by putting a brake on this consolidation — making the largest banks somewhat less profitable and steering investment and other resources into smaller banks, which, if they failed, wouldn’t take the rest of us with them.

The Obama administration has not specified either the size or the type of levy it would impose on the nation’s big banks. Officials are reportedly considering a tax on profits of the largest banks and a tax based on the size of their assets. Designing either will not be easy. Banks will deploy phalanxes of lawyers to avoid them and threaten to move their operations to friendlier climes.

To be effective, any fee or tax should be implemented as part of a coordinated effort with all the big financial centers around the globe. Britain and France would be likely to come on board. The Group of 20 leading industrial and developing nations asked the International Monetary Fund last year to study different ways to make big banks raise money to contribute for present and potential future bailouts.

Crafting a coordinated taxation regime might take a while. In the meantime, the Obama administration could start filling the budgetary gap with a windfall tax on those big bankers’ bonuses. It is a perfect way to say thank you.