Shenanigans over Bank Tax in Financial Reform Bill Missing the Point

Getting away from the Theatre (dare I say comedy) on Capital Hill over the Financial Reform Bill (not comedy) for a few minutes, I would like to point out that changes in behavior seldom occur without underlying structural changes.

This is also true with regard to economic behavior. A simple example: You may need a new car, but you aren’t motivated to purchase until you hear the magic words “zero percent financing!” You’re in the dealership 20 minutes later.

Whether or not you agree the bank tax was a good idea, or a good idea in its current form, the proposal was a move in the right direction. That being said, the silliness in Washington has reached extremes unimagined.

Dems: The bank tax stays in. GOP: We’ve now decided we won’t vote for it. Frank: OK, it’s out. Dems: It’s in, but taxpayers will pay for it using TARP funds, and banks will pay nothing! Then the GOP headline: “Democrats Choose to Use TARP Funding for New Spending, Instead of Deficit Reduction.”

Seriously, you couldn’t make this stuff up.

A few days ago I wrote about Britain’s new austerity measures. One reform they’ve implemented is a bank levy of 0.4 percent (0.7 percent after 2011) on banks whose aggregate liabilities exceed 20 billion pounds (about $30B).

Doesn’t it make more sense to tax high-risk banking behavior rather than taxing a pool of big banks? This action is roughly equivalent to making taxpayers pay for bad behavior by fellow taxpayers, like taking on mortgages they couldn’t possibly afford. But I digress…

If the goal is reducing risk, let’s focus on the actual behaviors that are putting the economic system at risk, not all players. Then we must change the underlying economic structure to match. Even if individual accountability is out this year, we need to start somewhere. Great Britain has made a good first step.

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