January 13, 2010
Where would the new bank tax money go? Regulator incentives
Posted by Erik Gerding

It pays to read Christine's latest post on the proposed new bank tax carefully.  She writes:

 In fact, a straight "financial institution profits tax" could encourage risky behavior by making the federal government a co-partner in that risky behavior.

Christine: by this statement, do you mean that if the government collects revenue from this tax, it may not have an incentive to regulate risky behavior?

This basic economic argument has been applied to sin taxes, like taxes on cigarettes.  Government might theoretically set the tax at one point to discourage "bad" behavior and at another point to maximize revenue.  This has led to the charge that states have an incentive to set taxes inappropriately because they rely on people to continue smoking to fund schools etc.

I've been interested in keying regulators -- like the SEC's -- budgets to overall market levels to make sure that regulators aren't outgunned when the market booms.  But I've been grappling with how current proposals  would work.  I am looking for literature from environmental law on whether tying enforcement budgets to polluter fees creates a perverse incentive on the part of the regulators to not clamp down on pollution. (Reader's scholarly suggestions on this literature are welcome.)

If there is a perverse incentive, this can be partially remedied by putting the money in a lockbox.  But we all know how sacrosanct lockboxes are in D.C.  Having the money in the lockbox, also begins to make this tax more like insurance.

Note:  I had a backlog of posts -- like one on SEC funding -- that I planned on rolling out over several weeks. Unfortunately, current events seem like a natural fit for much of them. 

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