Barack Obama's proposed tax on large investment banks is confused, flawed, and prone to circumvention. It is also welcome. First, the downside. There is a dangerous lack of clarity over the levy's purpose. Is it there to reimburse American taxpayers for the financial bailout, or to charge the banks a fee for the implicit guarantees they are now receiving from the government?
There is certainly a strong case for a banking payback. As Mr Obama argued this week, if these institutions are (by their own lights) healthy enough to pay out large bonuses to employees, they can make the US taxpayer whole for the aid they received at the height of the financial crisis in 2008.
Those who argue that these banks have already paid off the emergency capital they received from US government ignore the fact that the American taxpayers are still facing a daunting shortfall on their forced investment in the bankrupt insurer, AIG. The funds for the bailout of AIG went out directly to several investment banks which were counterparties to the insurer. Goldman Sachs alone received $13bn in this manner. And then there are the colossal wider economic costs of the financial crisis. The idea that American investment banks and the US taxpayer are now square is nonsense.
But if one of the purposes of this levy is to pay for insurance for future banking blow-ups, why is it only temporary? The implied use of the tax system to make the financial system safer is problematic too. Tax arbitrage is one of Wall Street's specialities. They will inevitably look for ways to get around it.
The plans were accompanied by some fiery rhetoric from President Obama, who castigated the "obscene bonuses" which Wall Street banks are planning to pay out to their employees. And obscene these payments most certainly are (not to mention foolish at a time when these banks are still undercapitalised). But if this levy is a response to such payments, would it not make more sense to tax the bonuses directly, as our own Government has tried to do?
A simpler and more radical approach towards the banking sector would be preferable, both in Britain and the United States. Reform should focus on overhauling the structure and supervision of the banks. That would mean separating trading and retail functions, mandating healthy capital cushions and imposing an effective and robust system of regulation. Most importantly, banks need to be small enough to be allowed to fail, or at least to be less able to hold governments to ransom when their bets turn bad. And these reforms should be enacted through legislation, not taxation.
Yet for all its imperfections, it is hard not to be encouraged by President Obama's new levy. Up until now, the White House's policies towards Wall Street have been hopelessly indulgent, from the easy terms of the bailout, to allowing the banks to repay their loans early, to the watered-down regulatory reform proposals.
This is the first policy from the Obama administration which might be said to inconvenience Wall Street. It is also the first policy that demonstrates some official recognition of the fact that bloated and risk-hungry investment banks are not necessarily in the public interest.
President Obama's bank levy is anything but perfect. But if it is the first stirring of a serious banking reform drive it may yet be remembered as a turning point in the struggle between the public and an over-mighty financial sector.