Banks Don’t Pay Taxes, People Do

| About: Financial Select (XLF)

The fate of the financial reform legislation in the Senate apparently depends on whether it contains a tax increase. The conferees hastily reconvened to remove one tax objected to by Senator Brown. Okay. That was a good move. But let’s not forget a couple of basics:

(1) the imposition of massive new regulations on the banking and financial system will raise costs that may not be called taxes, but will have a similar effect.

(2) the incidence of that cost-tax probably won’t be what was intended. Banks, like other businesses, will likely pass most of the additional cost onto their customers.

The cost-tax burden of this legislation will probably exceed the burden of previous similar legislation because a primarily goal of this legislation was to stick it to the banks. The legislation was deliberately punitive, designed to appeal to populist impulses. Cost was not considered a necessary evil; it was an intended evil.

A massive new consumer protection bureaucracy may do some good. It may preclude certain financial products that might have done some harm to some people. Making it harder and more expensive for banks to engage in derivatives trading may reduce some risk. But the question in both cases is, at what cost?

It’s hard to have faith that the ration of costs to benefits will be low when higher costs, along with the hoped-for benefits, were a goal of the legislation.

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