Alan Blinder: Banks Don't Pay Taxes
By David Henderson
Oh, and, by the way, the federal government is a taxpayer.
In an op/ed in Monday’s Wall Street Journal, “How Bernanke Can Get Banks Lending Again,” Princeton University economist Alan Blinder writes:
But suppose it doesn’t work. Suppose the Fed cuts the IOER [interest on excess reserves] from 25 basis points to minus 25 basis points, and banks don’t lend one penny more. In that case, the Fed stops paying banks almost $4 billion a year in interest and, instead, starts collecting roughly equal fees from banks. That would be almost an $8 billion swing from banks to taxpayers. There are worse things.
Now, before you jump on me for disagreeing with Alan Blinder’s proposal, please understand that I think it could be a good one. I’ve long said that one of the most exquisitely bad cases of timing was Bernanke’s starting to pay interest on reserves when what is needed is an increase in the money supply. I’m uncomfortable about taxing reserves, as Blinder wants to do, but certainly cutting the IOER to zero makes some sense.
My objection, rather, is to Blinder’s strange use of language in his second last sentence. In saying that the tax is a swing from banks to taxpayers, Blinder is saying:
1. Banks that pay taxes aren’t taxpayers, and
2. When banks pay taxes, the government, which collects taxes, is a taxpayer.
But, pretty clearly, banks do pay taxes. Blinder must know this because in the same article, he advocates taxing them. If you pay taxes, you’re a taxpayer.
Next, Blinder thinks that when the taxes are paid by banks, they’re given to other taxpayers. They’re not. The entity that gets these taxes is the government, not taxpayers. Now he could claim that when the government gets the $4 billion in added taxes, it cuts other taxes by $4 billion. I doubt that he believes that. He could claim that it cuts the deficit by $4 billion and, therefore, the present value of future taxes is $4 billion less. There he could be on stronger ground. But there’s a lot of public choice analysis involved in figuring out the right answer about future taxes. He would be better off having written what I’m pretty sure he knows and it would have gone something like this:
In that case, the Fed stops paying banks almost $4 billion a year in interest and, instead, starts collecting roughly equal taxes from banks. That would be a payment of $4 billion less to banks and a $4 billion increase in taxes on banks. There are worse things.
It doesn’t quite have the same ring, does it? It might get people wondering whether banks should be taxed more and whether government should get more taxes.
HT to Charley Hooper.