January 12, 2010
More on the Proposed Bank Fee/Tax
Posted by Christine Hurt

Yesterday, news outlets were reporting that Treasury was considering imposing a fee on banks, even those who have repaid their TARP money, to recoup losses the U.S. taxpayer expended in the $700 billion bailout.  These losses are estimated to be $120 billion, less than expected at the time.  Today, there is more information.

Today, the NYT is calling this fee a "tax, " and reporting that the tax is not only going to replenish coffers, but also disincentivize risky behavior.    So, what form will this tax take?  "The most likely alternatives would be a tax based on the size and riskiness of an institution’s loans and other financial holdings, or a tax on profits."  OK, so a "tax based on the size and riskiness" might disincentivize risky behavior, but a "tax on profits" would not.  In fact, a straight "financial institution profits tax" could encourage risky behavior by making the federal government a co-partner in that risky behavior.  Of course, the tricky part is figuring out how exactly to measure the size and riskiness of an institution's loans and other financial holdings.  This seems to be subject to some messiness, gaming and creative accounting.  So, it could be that the very easy to measure profits tax might win the day. 

The other area of discussion (or lobbying) will be which financial institutions will be subject to this risk tax or profits tax.  Community banks want to be exempted, and probably will.  I was thinking with a chuckle that a year or so ago, everyone wanted to be a financial institution, so that their publicly-held stock would be subject to the short-selling ban institution in the fall of 2008.  I blogged here about some interesting firms (of the almost 1000) that self-identified as financial firms, including IBM and CVS Caremark.  I guess they won't identify to be financial firms for purposes of the risk tax or the profits tax!

Most notably, no one is even hiding the fact that the real reason to impose this tax, to recoup losses that the U.S. government considered a good price to pay a year ago to save the world, is "to respond to the anger building across the country as big banks, having been rescued by the taxpayers, report record profits and begin paying out huge bonuses while millions of Americans remain out of work."

On a highly related note, in discussion this tax, members of Treasury mentioned other proposed taxes that were considered but not favored because the taxes would be passed on to investors.  Well, apparently they knew that investors were on the block down the hall.  The WSJ reports that Congress is considering applying the Medicare tax to investment income, not just wage income, to fund the proposed health care plan.  Now I can see an egalitarian argument in any congressional session that the incidences of Medicare should be felt not only by us poor-wage slaves but also by trust fund babies.  But apparently this tax is proposed as an alternative to another proposed tax that would have hit "high-cost healthcare plans" and the union members that love them.  Gosh, I hate politics!  Anyway, for our purposes, investment income is being fleeced elsewhere, so Treasury has to come up with a different way to capture some investment profits for itself.

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