Ezra Klein has some, to my mind, contentious ideas about how to fix Wall Street. He’s worried about the size, and power of big banks, both of which feed and are in turn fed by their profitability. Unless you can make them less profitable, he argues, they will be able to influence regulators and legislators; Wall Street is simply too profitable to exist in our corruptible democracy. He writes:
…I don’t believe you can effectively regulate the financial industry so long as it’s sucking up about a third of domestic profits. The incentives to take massive risks will just be too great. The power to bribe Washington to dismantle regulations and legislation will be irresistible over time.
His solution is that we need to take advantage of the brief moment of public interest in financial regulation to tax Wall Street profits down to a size at which they can’t buy as much regulatory influence. So if I understand him correctly, we can’t trust future regulators and legislators because
There’s money, expertise and interest on one side of the ledger, and the other side is likely to be spending its time on other things. How long till one party or the other needs to fund a tough reelection campaign and cuts a quiet deal with the financial sector?
And trying to hold Wall Street’s massive profits down via legislation and regulation will increase or decrease the amount of money, expertise, and interest that they are willing to commit to influencing legislators? Say you do manage to hold Wall Street’s profits down by $50 billion a year with $50 billion a year in taxes. You’ve just given Wall Street a $50 billion incentive to influence financial laws and regulations. They can now spend $5 billion a year trying to get that tax repealed and make a profit on that effort if it takes them less than 10 years.
My guess is that giving Wall Street maximum incentive to focus on changing whatever FinReg laws are passed this year isn’t going to make it easier for future legislators to leave those laws in place; it’s going to make it impossibly hard. I know it would feel great to pass a law that Wall Street hated by trying to maximize the damage to their profits, but laws designed to cost Wall Street money are laws designed to face a rough future.
In addition, an even worse possibility than future banks simply getting the massive profit tax laws repealed, is the threat that they manage to use the massive profit tax laws to their advantage; carving out loopholes for themselves, using the tax to erect barriers to entry, turning it into a protectionist policy that taxes foreign banks more than domestic banks… these things could all help Wall Street become less competitive, more centralized, and thus more dangerous.
This whole idea strikes me as unprecedented, highly speculative, politically costly, and more likely to make things worse than better for future regulators, legislators, consumers, and taxpayers. So no, you can’t tax Wall Street into submission.