October 18, 2012
Sir, Manmohan Singh, of the IMF, but in his own name, writes “It’s time to land the levy on risk takers, not taxpayers”, October 18, and he might be right and he might be wrong. Personally I lean towards the second because, if you really do not know what you are taxing might be producing it is hard to avoid any unforeseen consequences.
First of all, what we have to do is not to concentrate blindly on minimizing the direct cost for taxpayers of any financial failure, but instead analyze how to maximize the net result of what the financial sector produced was to the taxpayer.
In fact one of the saddest aspects of the recent crisis is that the costs of cleaning it up might very well have been surpassed by all that opportunity cost which resulted from regulations that favored bank lending to “The Infallible”, and discriminated against “The Risky”, the small businesses and entrepreneurs. Who can swear that had the bank regulators not done that we could not perhaps have tons of good jobs for all our unemployed youth?
In this respect I would appreciate regulators, IMF economists, and alike, first define to us with clarity what they believe is purpose of our financial system, and only thereafter opine how his proposal can better help us for that sector to fulfill its purpose. Most often than not, I am sure the answer would be, by not distorting its functioning like for instance with special levies.
As a taxpayer let me be clear. I do not mind paying plentiful taxes if I am making plentiful income… so please do not try to save taxes by reducing my income.
That of course does not mean that I would not oppose all the regulatory subsidies that help make some sophisticated bank dealings so sophisticatedly profitable, as these just distort just as much as taxes, sometimes more
By the way, a reminder, the most severe real losses sustained the last years, have not been in derivatives but in plain vanilla operations, like securities backed with very real but very badly awarded mortgages to the subprime sector and which managed to get an AAA rating, the Spanish real estate sector, or loans to some “infallible sovereigns”.
By the way, a reminder, AIG would never have become a problem, had not the regulators enriched the value of their AAA rating so much.