Today the Obama administration released more details on the shape of its proposed fee to push the financial services industry to pay the freight for the cost of cleaning up after the financial crisis. For some time it had been known that this would take the form of some kind of tax on banks, and it looks like they’ve chosen to do it as a levy on essentially the size and leverage of the institution. Firms with less than $50 billion in assets will be exempt, whereas larger firms will be taxed according to the formula illustrated in the graphic I’m reprinting here. The White House press office wants you to know that “60% of the revenue will come from the 10 largest financial firms.”
This seems like the right way to go to me. Something important to note is that the exemption of smaller firms from the tax ought to sharply limit the extent to which the incidence of the tax winds up falling on consumers. When you tax firms, they typically pass the cost on the consumers in the form of higher prices, who then pass some of the cost back in the form of reduced purchases. The extent to which firms or consumers wind up holding the bag has to do with how viable it is for consumers to shift consumption to other kinds of things. Since smaller firms will pay little or no tax under this plan, customers of the biggest banks will have the option of simply switching to other, smaller banks. The result is that in addition to raising revenue, you’re creating a disincentive to create huge firms unless amalgamation is providing some major economies of scale.
To that end, it seems to me that this proposal could perhaps be improved by giving it a progressive rate structure so as to constitute a continuous disincentive against excessive size and leverage. As currently constituted, the fee gives smaller firms a bit of an advantage against bigger ones, but once you enter the “big bank” category there’s still no incentive to do anything other than becoming bigger and bigger.