Conservative economist and Bush advisor Greg Mankiw lays out the case for something along the lines of the Obama administration’s TARP recovery fee:
What to do? We could promise never to bail out financial institutions again. Yet nobody would ever believe us. And when the next financial crisis hits, our past promises would not deter us from doing what seemed expedient at the time.
Alternatively, we can offset the effects of the subsidy with a tax. If well written, the new tax law would counteract the effects of the implicit subsidies from expected future bailouts.
Will the tax law in fact be so well written? It certainly won’t be perfect. But it is possible that it will be better than doing nothing at all, watching the finance industry expand excessively, and waiting for the next financial crisis and taxpayer bailout.
Of course the logic of Mankiw’s argument is that the tax should be permanent, rather than temporary. It also implies that the tax rate should be higher than Obama’s proposal. I think it further implies that there should be a graduated rate structure. It’s pretty sad that the administration can’t even come up with a proposal that’s left-wing enough to suit Mankiw’s take on the situation.