The theory behind the tax is that, if it is based on the level of risk that banks take when trading for their own accounts, it will make bank behavior less risky. The tax could also be based on the size of liabilities that banks have on their balance sheets. The capital raised by the tax could also be used to fund any bank bailouts or restructuring costs in the future. It would also go toward repaying the money that governments have put into banks at the peak of the credit crisis.
Brown underestimates the fight that US financial firms are prepared to make against a tax and the fairly good chance that Congress will turn such a program down. Banks may argue that a tax would cut into their profits. The by-products of that are lower shareholder returns and less money available to make loans to consumers and businesses.
The Brown initiative is probably doomed because it runs against the efforts of the American government to encourage banks to increase the amount of liquidity in the market. Congress can always forbid or restrict risky proprietary trading at banks that take deposits. It does not need to levy a tax to carry out that goal.
Douglas A. McIntyre
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