The Obama Administration’s proposed bank tax doesn’t solve the too-big-to-fail problem. And it’s arguably too small, although I think one barrier to making it bigger was the issue I mentioned yesterday, which is that the balance sheets of at least some of the big banks are still a bit shaky, and taking substantial amounts of capital out of them this early in the recovery may have seemed injudicious. (I’m thinking here especially of Citigroup.) But for all that, it’s a good proposal that will raise a significant amount of money ($117 billion over ten years is not, even by today’s standards, trivial) and will provide a disincentive (a too-small disincentive, but still a disincentive) for banks to keep getting bigger.

This seems like such a reasonable proposal, in fact, that I’m a bit surprised that anyone to Obama’s right (that is, anyone who thinks the plan is too harsh, rather than too soft) is arguing against it. But they—with “they” meaning, above all, the banking industry—are. Two main arguments seem to have emerged. The first argument (which, oddly, some people on the left as well as the right are making), is that any tax would be passed along to consumers. Now, this is an argument that can be, and is, made against any corporate tax, and given the fact that Americans think that corporate taxes make sense generally, there’s no obvious reason why this tax should be an exception. More important, it’s unlikely to be true. To be sure, some of the tax will be passed along. But the Obama proposal exempts banks of less than $50 billion from the levy, which means that to the extent that the big banks raise prices in response to the tax, they’ll be making themselves less competitive in the marketplace. Now, it may be that in arguing that consumers will end up paying this tax, what bank lobbyists are really admitting is that smaller banks just aren’t real competitors to the big banks and serve as no competitive check on their prices. But I don’t think that’s an argument—“the big banks are so powerful that they can pass any cost increases along to consumers”—that bank lobbyists really want to be making.

The second argument is even more dubious, namely that the tax will crimp lending. Jon Hilsenrath offers up a sophisticated version of this argument, saying that since banks need to increase liabilities to fund new loans, any tax on liabilities will also reduce the number of loans. Now, in the first place, it isn’t true that banks have to increase liabilities to fund new loans: they can also fund them by raising capital. In other words, instead of borrowing money that then re-lend, banks could raise money by selling equity, and then lend that out. The truth is that the tax is too small to fundamentally shift the way banks fund themselves, but anything that encourages banks to rely more on equity and less on debt is a good thing.

More concretely, Hilsenrath’s argument implies that the banks are currently lending to their full capacity, so that if they want to do any more lending they’d need to expand their liabilities, which the tax will discourage. But this isn’t even close to being true: banks currently have more than a trillion dollars in reserves, which is effectively cash just sitting in the bank. If they wanted to lend—and if there was sufficient demand for lending—they have more than enough capacity to do so without taking another dime in liabilities. In other words, the impact of this tax on lending will be, to the nearest approximation, zero.