Why I Was Wrong

Last week I read of President Obama's plan to add a 15% tax to very large banks (those with over $50 billion in assets). Being a capitalist to my core, I assumed this was a bad idea. "The banks will just pass that on to their customers," was my thought.

I believe I was wrong.

I have to give thanks here to a friend of mine that discussed the issue with me. The conversation went something like this:

Me: Can you believe this tax? The banks are just going to pass that extra 15% on to their customers.

Friend: Actually, that's not true.

Me: What? I thought you studied economics? You should know better.

Friend: If the tax is assessed across all bank, you may be right. However, in this case, the tax is only being levied on banks over $50 billion in assets. That means those banks can't just pass on the tax or they give a competitive advantage to smaller banks.

Me: I see.

That's roughly how the conversation went and in the end, I have to say that my opinion was changed and I am now in full favor of this tax for a few reasons:

1. This whole thing about banks being too big to fail really makes me mad. Unfortunately, the way the system works today, it's a reality. We can't let an institution that holds a trillion dollars or more of US assets just go belly up. It would be devastating.
2. If we can agree on item 1) then the only solution is to make sure that banks don't get too big to fail. Yes, I realize this is a bit antithetical to capitalistic beliefs that I hold, but the fact is that banks are different from most other economic entities. They are a center point of the US (and the world) economy. By guaranteeing them the government will bail them out if they screw up, they lose the incentive to be cautious. This is a very, very bad situation as the past 18 months has shown us.
3. There are three basic options to limit the size of banks: Tons of government regulation that will be confusing, expensive, and ineffective; have the government force a break up if they get too big; or a tax policy that either discourages enormous banks from forming or provides a competitive advantage to their smaller competitors.

I don't think government regulation is generally effective (people are very smart about finding the loopholes) and I'm very opposed to the government breaking up just about any business. So that leaves the tax code as the only real option (as far as I'm concerned).

By levying this 15% tax on big banks, their growth will slow because they can't pass that cost on to consumers. If they try, it will drive people to smaller banks. Likewise, it will discourage mergers between mid-size banks because, if they go over the $50 billion threshold, they will be put at a disadvantage.

In short, I'm going to have to support this idea even if I don't support Obama's populist rhetoric to try to get it passed.