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Would Taxing Banks Really Make the Banking System Safer?
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Would Taxing Banks Really Make the Banking System Safer?

David VanHoose
Mercatus Center, 2013
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7

Recommendation

Economics professor David VanHoose puts forward a vigorous argument against using taxes to control bank behavior and protect the banking system from future shocks. He contends that such measures would prove ineffective in real-world banking. Though some of VanHoose’s assumptions will meet with opposition, getAbstract believes his ideas will trigger discussions on banking tax among finance professionals, regulators and government policy makers.

Summary

Some economists propose that taxing banks will coax them away from the kinds of risky lending behaviors that contributed to the 2007-2009 crisis, repair “negative externalities” to the banking system and force banks to act in the best interests of the system rather than in their own interests. But this argument misdiagnoses the causes of the banking crisis and fails to consider the unintended consequences such taxes would have on the composition of banks’ assets and liabilities. A tax would encourage banks to reduce costs by subjecting all loans to less internal scrutiny and monitoring, thus eroding the intended benefits.

About the Author

David VanHoose is an economics professor at the Hankamer School of Business at Baylor University.

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