How Big a Bank Tax Would It Take to Pay for the Cost of the Meltdown?

As I noted on Wednesday, the International Monetary Fund is proposing that the financial services industry should be subjected to a Financial Activities Tax (PDF) to defray the large social costs of the financial meltdown. How big of a tax would it take? The Financial Times, knowing which side of its bread is buttered, seems skeptical of the whole concept but their Lex team helpfully took the time to run the numbers:

But the IMF puts the net fiscal cost of the last financial crisis to American taxpayers at 3.6 per cent of gross domestic product — some $513bn — as of end-2009. That means it would take a whopping 23 years to fill the hole using the new levy. No wonder the IMF proposes hitting the banks for more money, this time a Financial Activities Tax on profits and remuneration. Roughly how hefty would a FAT tax have to be to pay the cost of the bank bail-out within a decade?

Assume, generously, that recent aggregate operating revenues for the entire US banking industry continue at their mid-2000s level of about $500bn a year. Assume too that the government is indifferent, as the IMF suggests it should be, between taxing banks and bankers. On top of the first levy, another 6 per cent tax would have to be charged to bank operating revenues. That would hurt. Worse, though, it will be a decade before all of this pain starts to pay towards the IMF’s desired “credible and effective resolution mechanism” for future crises.

Pretty clearly the odds of doing this aren’t great, since it would take difficult-to-achieve international coordination. What’s more, as furiously as bankers are opposing any effort to regulate the firms they run, the thing they’d really hate is just taking their money. That said, this is a good idea and it’s worth working toward the long run. All developed countries are facing long-term fiscal challenges related to the aging of their populations, and many observers believe that the next financial crisis will come sooner rather than later. This kind of FAT is a measure that could help mitigate both problems, and should continue to stay on the public radar.