This gives an incentive to increase debt. On obvious solution–that is politically impossible–is to set the corporate tax rate to zero, and then increase tax rates on individuals. Indeed, there are a lot of dead weight losses reduced there. But how about simply adding a tax based on debt? Interest expense could be taxed as if it were profit.

When we add distortions and then ‘fix’ them via more distortions, we aren’t very good at anticipating the unintended consequences.

I seem to be the only person who remembers history. What spooked Paulsen et al. was not the failure of Lehman on Monday, it was the fact that by Friday (via the mediation of the Reserve Fund), it appeared that the commercial paper market was going to shut down, throwing every industrial company in America into insolvency. So my first question would be, is this heavy tax on short-term liabilities going to apply to everyone, or just financial institutions? Because if it’s just financial institutions, it only leads to further, and more dangerous, disintermediation. And if it includes non-financial companies, then (i) let’s drop the snarky references to the carry trade and (ii) let’s recognize that we are talking about something very different from the Obama proposal.