Rein in banks using taxes

That was President Obama’s crystal clear message yesterday, when he rolled out plans to tax big banks as much as $117 billion over the next 12 years. He said he wanted them to pay the estimated cost of the government’s Troubled Asset Relief Program, an expense forecast to eventually come in at about $120 billion. The real message was simply: Make them pay.

While the political calculations behind that message were obvious, the president’s explanation for it didn’t make a lot of sense. He was promoting the right idea for the wrong reasons.

The message of the day was about punishing unpopular businesses and people by using the tax code, never a good idea. He wanted to hold big banks accountable for the money government will never recover from the TARP, though they have repaid their own debts to the program. Obama suggested big banks should pay because they benefited from the government’s intervention in the financial system, even though many other banks and businesses did as well.

Those were all bad arguments. Here’s the right one: The idea of taxing very large banks and some of the riskier things they do makes sense because it would deal with a serious long-term threat to America’s financial system. Those taxes aren’t the answer by themselves, but they would be an important part of a solution.

Government itself helped create a new threat to the system when it took the implicit idea that some banks were too big to fail and turned it into a hard fact by 2008. Massive financial support for giants like Bank of America and Citigroup, among others, did that. The initial round of TARP funding, aimed at very large institutions deemed essential to the economy, created a concrete list of banks that were too big to fail.

Those banks are dangerous because the people running them know they can’t lose. They need to be kept on a tighter leash by regulation, for the safety of everyone around them. For all the talk about new financial legislation, no one is close to an agreement on this issue yet.

Regulations that limit risky business at big banks should be part of the answer. But taxes are another tool worth using.

Taxes would help because they would discourage - but not prohibit - very big banks from getting even bigger.

“It goes a long way to solving the problem,’’ says Con Hurley, director of the Morin Center for Banking and Financial Law at Boston University. “You put in this mechanism where there’s a penalty for being too big to fail. These guys will figure it out, whether they want to be in that league or not.’’

More taxes on banks that are too big to fail might sound unfair but they are not. Those banks enjoy many privileges. Most important, the marketplace recognizes their special status and lends them money at better rates. In that sense they operate at a competitive advantage made possible by the ultimate business insurance policy. And that insurance shouldn’t come free.

How much is the advantage really worth? The Center for Economic and Policy Research measured the difference between borrowing rates for institutions with more than $100 billion in assets, and those with less than $100 billion. It took those measurements before and after “too big to fail’’ became a reality.

The big banks always got better rates when they borrowed money. But once the “too big to fail’’ concept became a concrete reality, the gap in rates between smaller and larger banks expanded by another 0.48 percent or so.

That doesn’t seem like a lot, but apply a half a percentage point on the trillions of dollars big banks borrow in the course of a year, and you’re talking about real money. Depending on how you do the math, the amount those banks save in lower borrowing costs might look a lot like what they’d have to pay under the Obama tax plan.

But the Obama tax plan is only temporary, with an expected life of 10 or perhaps 12 years. An effective tax strategy to deal with the risk of banks that are too big to fail should be permanent.

Who knows what will come out of the financial regulation debate? But taxes on big banks are a real answer to a problem that runs deeper than today’s public anger.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.