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Thursday, July 23, 2009

The LA Times reported today that the Federal Deposit Insurance Corp. (FDIC) has proposed taxing any company which the government categorizes as "too big to fail." The collected money will rest in a "resolution fund" to be used for further bailouts.

There are several reasons why this plan is a terrible idea. First, and most obviously, this plan will punish companies for growing too successful. The United States is not a country that punishes success. In her testimony, FDIC director Sheila Blair proposed taxing companies that pose a risk to the financial system.

This is not a case of government policy having unintended, negative effects on business. Blair clearly stated the intention of this proposal, which President Obama supports: "This system also could provide an economic incentive for an institution not to grow too large [emphasis added]."

Second, Blair lied in stating that taxing large companies to fund future bailouts will come at not cost to taxpayers. In 2005, 50.3% of U.S. households owned financial equities such as stock and mutual funds. This is up from 49.5% in 2002 (which may not seem like much but represents an increase of more than 4 million households). As such, taxing these large companies constitutes taxing roughly half of American households.

Finally, the FDIC's proposal encourages large businesses to engage in risky behavior. The stated purpose of the funds is to bailout these large businesses in the future. If a bailout is guaranteed, it reduces the risks involved in the same activities that caused the current financial recession.

To summarize, the FDIC and President Obama support imposing a new tax on large companies that pose a threat to the financial system for the specified purpose of discouraging companies from growing too large, while encouraging these same companies to engage in risky financial transactions by guaranteeing a bailout -- all at a cost to taxpayers.

Posted by Eleutherian

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