Prof. Jayanth R. Varma's Financial Markets Blog

Photograph About
Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iima.ac.in

Subscribe to a feed
RSS Feed
Atom Feed
RSS Feed (Comments)

Follow on:
twitter
Facebook
Wordpress

January
Sun Mon Tue Wed Thu Fri Sat
 
27
     
2018
Months
Jan
2017
Months

Powered by Blosxom

Sat, 27 Jan 2018

Regulation as Pigouvian stealth taxation

“Regulation is stealth taxation,” said US President Donald Trump at Davos yesterday. Can this taxation be Pigouvian, and can this stealth taxation be a good idea? That is the claim in Turk’s thought provoking paper “Securitization Reform after the Crisis: Regulation by Rulemaking or Regulation by Settlement?”

Turk argues that:

can been seen as imposing a Pigouvian tax on the specific market externality associated with securitization, and therefore come surprisingly close to a first-best policy intervention.

missed the mark because it was premised on a flawed theory of the role that securitization played the crisis, which emphasized traditional notions of fraud rather than poor risk-management.

It appears to me that there is no convincing evidence that securitization imposes large negative externalities requiring a Pigouvian tax. On the other hand, there is somewhat more evidence that banking creates large negative externalities, and Basel 3 is a kind of Pigouvian tax on banking. This Pigouvian taxation has also happened by stealth in the name of risk reduction.

We should worry about the knowledge deficit and the governance deficit in these exercises in stealth taxation. Regulators probably think that they have calibrated the Pigouvian tax correctly; but this is more likely to reflect conceit than genuine expertise in this field. Even if the expertise is granted for the sake of argument, the governance issue remains: can taxation be delegated to unelected regulators?

Posted at 20:00 on Sat, 27 Jan 2018     View/Post Comments (0)     permanent link