Friday, January 15, 2010

When Irrational Meets Rational

Taxing the "greedy" banks is a popular idea. But the reasons that most people give for supporting a tax on banks is emotional.

"It's not fair that they can make so much money while everybody else suffers!"

That's not a great reason for a tax. Greg Mankiw gets the argument for taxing the banks right.

The linked post gets a little technical, but basically the idea is this:

After the financial crisis, the banks know that they can rely on the government for money when they are close to failure. As a result, they will expand too much and take too many risks. To slow bank growth and raise money for future bail-outs, the government should tax the banks today.

That is a good reason for a tax.