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By James Kwak

Let’s hope this gets laughed out of consideration. According to the New York Times, the Securities Industry and Financial Markets Association is considering a lawsuit on the grounds that “a tax so narrowly focused would penalize a specific group.” The Times articles doesn’t use the words, but I’m guessing they are thinking of claiming that it is a “bill of attainder”–an act of Congress that punishes specific people for alleged wrongdoing, without a judicial process–which is specifically prohibited by the Constitution.

But even leaving aside the fact that the Supreme Court has rarely overturned anything as a bill of attainder, there are not one, but two barriers in the way. The first is that the original TARP legislation mandated that the government had to recover the costs of TARP from the industry. The second is that the bank tax is really a (too small) tax on large banks that enjoy a too-big-to-fail subsidy from the government. And since the banks enjoy an implicit government guarantee, they should pay a fee for it (in this case, a mere fifteen basis points on uninsured liabilities), both to defray the costs of future bailouts and to (very partially) level the playing field relative to smaller banks without government guarantees. For political reasons, the administration is trying to dress the tax up as punishment for Wall Street, which begins to sound like a bill of attainder. But under the covers, it’s simply sound regulatory policy (though, again, too small).

Update: Greg Mankiw thinks that

on the economic merits, there may be a case for the bank tax

as a means of offsetting the implicit government subsidy for TBTF banks.

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.

Source: Bank Tax: Finally, A Little Regulation