Thursday, December 10, 2009

Krugman Is Losing It

He comes out in favor of a proposal in the UK to tax investment bankers' bonuses.

His argument seems to be on the justice side of things. Hey, these guys made a lot of money and they got bailed out by the government, so we ought have no compunction about taxing them all special like. Plus, he'd rather the best and the brightest go into other, more productive fields. I'll concede those points. Not because I agree with them, but because they don't really matter.

What we are talking about here is taxing money earned by people who move money around. To tax something you first have to define it. Well, money is fungible. Bonuses can quickly become stock options or temporary pay increases or whatever the fuck these clever fuckers come up with.

If the government writes a tax rule one way, these guys will simply redefine their income. If the government rewrites the rule, they will do it again. Problem is that each time they rewrite it to include the new way, they will inevitably catch some people who they aren't intending to include. Also, it will be hugely distorting and ultimately this is a fool's errand. Plus, there a strong tinge of revenge and jealousy in the politics of this. And this is all political, not economic.

If your goal is to make the financial sector more stable over the long-term, and not simply to punish bankers, then increase capital requirements. The increased capital requirements will lower leverage, which will in turn lower bank risk, which will in turn lower bank profits, which in turn will lower banker bonuses based on how much money they can make for the firm. That is the correct way of doing these things, not trying to tax specific types of money going to people whose job is to manipulate money. Taxing the bonuses is trying to cure the disease by scratching the rash.

1 comment:

Anonymous said...

You think he had it in the first place? dave.s.

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