It’s Time to Raise Wall Street’s Taxes

October 22, 2010

For Wall Street’s big banks and the people who run them, the economic crisis is over.  While Main Street struggles and the unemployment rate remains close to 10 percent, bank profits are back to pre-crisis levels, and the salaries and bonuses of executives at the nation’s top domestic banks are again at near-record highs. This week, with the agreement of top U.S. bank regulators, JPMorgan Chase and Citigroup announced plans to let shareholders in on the party. The banks are set to increase dividends or buy back shares of their own stock to boost share prices.

The banks argue that they’ve repaid their debt to Uncle Sam and should be allowed to get back to business as usual – which, as usual, means enriching themselves. But they forget that the financial crisis cost Americans far more in lost jobs and income than the price of the taxpayer bailout. The country still faces $730 billion in lost output in 2010 as a result of the economic crisis.  It’s time to get serious about reining in the big banks and other large financial institutions. Raising their taxes would be a start.

There are good economic reasons to do this.

Regulators have made it clear they are not going to let the big banks go under, and this has made it possible for these banks to borrow at below-market rates. Creditors are willing to do this because they believe the banks will be rescued if they get into trouble and won’t be allowed to default on their debts. The big banks should pay for this implicit government subsidy, and a tax would let them do just that.

Moreover, the financial crisis was brought on by the greed and cupidity of financial institutions that regulators deemed too big to fail. The Fed protected some of the failing institutions by absorbing their bad debts and facilitating a merger with stronger institutions  — Countrywide with Bank of America and Bear Stearns with JPMorgan Chase are examples. As a result, the big banks are now bigger than ever. Increased consolidation in financial services has reduced competition and allowed the largest institutions to command higher profits. In the interests of both fairness and economic efficiency the government should tax these institutions and capture this economic rent.

Taxing banks based on what they pay out in compensation and dividends and using the funds to support programs that benefit ordinary people would go a long way toward remedying this situation and compensating taxpayers for the economic losses they have sustained.

The so-called ‘flash crash’ in May, when the stock market suddenly plummeted for no obvious reason, exposed the extent to which people trading based on underlying economic fundamentals have been replaced by traders using borrowed money to engage in financial arbitrage – buying and selling financial instruments to take advantage of minute discrepancies in price. A small financial speculation tax would reduce this hyperactivity without hurting the economy – and would raise substantial sums that could be used for the public good.

It’s the recession – triggered by the excesses of the big banks and other financial services firms – that has reduced tax revenues, raised the need for public services, and led to high fiscal deficits. Addressing this situation by allowing the stimulus to expire and states to cut spending will only prolong the agony of high unemployment and slow growth. If the deficit hawks are serious about wanting to reduce the deficit, raising these taxes on financial institutions is a good place to start.

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