Deficit Reduction and Windfall Taxes

There a number of reasons for instituting a windfall tax on bankers, and they’ve been most ably spelled out by the Financial Times’s Martin Wolf in a November column.

While there are plenty of moral reasons, the primary (non-political) impetus is to prod the bankers to build their firm’s capital reserves rather than blow it on themselves. This is uncontroversial, the UK’s Alistair Darling said as much when he announced the levy last week.

But over at The Big Money, Heidi Moore says such a tax won’t be done here because it won’t solve the deficit problem. Huh?

Between January and September this year, the six largest banks in America put aside $112 billion for total compensation, according to the New York State Comptroller. That includes salary plus bonuses for all employees, from the IT guys to the hotshot traders. So even if the federal government took half of all that, it would still amount to a total of $56 billion in the federal coffers.

It’s a rich payday for individuals, to be sure, but not rich enough to solve the federal government’s cash crunch.

On the list of reasons to slap a windfall tax on gubmint-cheese-fed bankers, reducing, much less solving, the deficit is so far down as to not even really be a factor in any such decision.

The British government estimates that its windfall tax will bring in about £550 million ($887 million). You’re not going to such a sum down, but as far as deficit-reduction goes it’s hardly worth mentioning. While the U.S. bonus pool is several times as large, so is its economy. The thing scales.

But the main point is deficit reduction isn’t the point. It’s a small ancillary benefit of such a tax, not a reason not to do it.

Moore does posit a secondary reason why it won’t happen here: The time has passed politically. That’s true to a certain extent, but does anybody doubt that such a move would be hugely popular here? One of the reasons Obama’s poll ratings are stuck in the dumps is he’s hardly been aggressive with the bankers who caused the crisis.

The reason he hasn’t is the reason why such a windfall tax won’t happen here: Obama is an incrementalist who’s surrounded himself with people who think like bankers, and who has exiled people like Paul Volcker who show independence—who aren’t captured in their thinking. He’s allowed bankers to grease his palms and lobby with government money, as Moore points out (I SHOULD ADD: This goes for Congress, too, obviously).

But not reducing the deficit much just doesn’t have much to do with it. The real point is to punish the bankers while forcing them to shore up their capital or even lend the money to the productive economy.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.