Taxing the banks& mythical debt burdens

January 18, 2010

The Haiti rescue operation continues to do its life saving work. We wish them well and urge you to help out with whatever cash donation you can manage.

On another front President Barack Obama has recently announced a tax on the banks to help recover some of the money that the American government gave to the banks during the height of the financial crisis. The money is to be
collected from the banks over the next ten years and will total close to 100 billion dollars. The move will prove to be politically popular because of the widespread resentment among the American public over the monies that the big banks received, the grotesque nature of their greed inspired bonuses and the fact that they have prospered all the while that the ordinary American has suffered high unemployment, depleted retirement accounts and low wages because of the economic crisis.

The bankers did not help their cause by the testimony of some of their leading CEOs before congress during which they sought to defend their bonus policy behaviour.

However, the danger in any tax of this sort is the capacity of the banks to pass on the tax to their clientele in the form of higher service charges and fees .The biggest banks to which these taxes will apply may well have the market share to ensure the partial shiftability of the tax. The President's economic team will have to monitor the evidence of this shifting over the coming months and years.

On another critical front, politicians in Canada and the U.S. continue to repeat false and misleading statements about the burden of the public debt on future generations.

This burden is largely a myth and reflects considerable confusion on the part of otherwise intelligent politicians about the nature of public debt and how it is financed.

Firstly, most of the debt is financed from domestic savers. It is financed by the sale of treasury bills, bonds and other paper instruments. The generation that buys them rightly sees them as assets. If they have not redeemed them at their death their heirs inherit them. So not only does the next generation inherit the debt but it also inherits the assets that go with the debt. There is no intergenerational burden.It is largely a fiction.

In addition not only does the next generation inherit the interest bearing assets alongside the debt but they inherit the infrastructure that is built and restored by the stimulus that has been financed by the debt as well as benefit from the care   and education that their parents' generation spends on them , some of it financed by the stimulus itself.

So this burden is a myth.

The schools, colleges, hospitals , roads, ports and so on built by the stimulus will last and provide value for future generations for decades to come. There is no net burden but there is definitely a large net benefit.

Politicians ought to do their homework more carefully before speaking publicly about these issues.

If they do not find my words convincing enough(I have been saying and writing this sort of thing for the past three decades) simply have a look at an excellent book by Francis X.Cavanaugh,the truth about the National Debt:five myths and one reality, published by Harvard Business School press, 1996.

In particular read the first couple of chapters where he discusses the myth of the burden of public debt on future generations.

His credentials are impeccable. He was the first executive director and CEO of the Federal Retirement Thrift Investment Board. He was also an economist and senior career executive in the U.S. Treasury responsible for debt management policy advice. His book on the subject is one among many worth reading . His perspective coming as it does from a former senior official   is particularly valuable.