THE Oracle of Omaha is not a fan of the proposed tax on large banks:
“I don’t see any reason why they should be paying a special tax,” said Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., in an interview on Bloomberg Television today. Supporters of the plan to tax the banks “are trying to punish people,” he said. “I don’t see the rationale for it.”
Mr Buffett’s argument is based on the idea that the tax is meant to cover the cost of TARP, which most of the large banks have already repaid. There are two problems with this. First, as Mr Buffett well knows, TARP was far from the only aid provided to large financial institutions during the crisis. Guarantees with potential values in the trillions were extended, along with easy emergency funding. That amounted to aid to banks and the assumption of bank risk by the federal government, a favour for which it stands to reason taxpayers should be compensated.
The second problem is that repayment of TARP isn’t really the best reason for the tax. The administration seems to know this; in advocating for the bank tax it acknowledged that a tax on leverage would counteract the negative externality posed by being too-big-to-fail and reduce careless risk-taking. But I don’t think that message plays as well politically as an effort to get Wall Street to pay back TARP.
But Mr Buffett should know better. It’s interesting that he says:
Look at the damage Fannie and Freddie caused, and they were run by the Congress…Should they have a special tax on congressmen because they let this thing happen to Freddie and Fannie? I don’t think so.
The reference to Fannie and Freddie is instructive. They weren’t actually run by Congress but operated as public companies. And yet, because they were government-sponsored entities, it was assumed that they enjoyed an implicit government guarantee. That government guarantee allowed them to borrow more cheaply than a purely private competitor, which enabled them to become too large and too risk-heavy. A tax on size or leverage would have counteracted the negative incentives generated by the implicit guarantee. And that’s the idea behind the bank tax, or at least it should be.