Felix Salmon

The bank tax emerges

By Felix Salmon
January 14, 2010

Jackie Calmes has the broad outlines of the new bank tax, and I like the way it looks: essentially, it’s a 0.15% tax on bank liabilities excluding deposits (which already come with an FDIC fee attached). It would be paid by roughly 50 firms, including GE Capital, and would raise something on the order of $90 billion over 10 years. That’s an average of $180 million per firm per year, which seems eminently affordable to me.

US subsidiaries of foreign banks like HSBC and Deutsche Bank will be taxed; it’s unclear whether foreign subsidiaries of US banks will be as well. The aim of the tax is to ensure that the entire TARP fund gets repaid in full — not just the money lent to the banks directly, but also the money lent to the banks indirectly, through the AIG bailout. The tax is not, however, designed to repay the cost of rescuing Fannie and Freddie.

I like the way the tax is structured: it’s simple, and the liabilities-minus-deposits formula naturally puts more of the onus on investment banks than commercial banks. It also encourages banks to fund themselves with equity rather than debt.

Will the fee be passed on to bank customers? Well, it doesn’t apply to deposits, so retail banking customers shouldn’t be affected, but you never know. If they are, at the margin that might be no bad thing, if it encourages bank customers to move their money to small-enough-to-fail banks and credit unions.

Critics of the tax are certain to focus in on the rhetoric surrounding the announcement, and to denounce it as politically-motivated populism. Which might even be true. But just because a policy is popular doesn’t necessarily make it a bad idea. And this one makes a lot of sense.

7 comments so far | RSS Comments RSS

agree, this is simple and logical and well framed and of course the customers (borrowers) will pay for it….and now that banks will pay for systemic insurance, they will be *owed* a rescue next time the system blows up, so like with all insurance we get more moral hazard not less.

Posted by alea | Report as abusive

Could this be the first sensible and straightforward piece of policy since the beginning of the crisis?

Posted by lemarin | Report as abusive

Alea, I’m not sure I buy-in to your view that a TBTF tax would give rise to more moral hazard. Hasn’t the expectation of rescue from systemic distress always been there? This proposal merely adds a funding mechanism for insurance that already existed, no?

If I were to attack this tax, I’d do so on first principles. I’m beginning to wonder whether breaking up or shrinking down TBTF banks would, in fact, mitigate systemic risk. I think I know where the intuition is coming from: big/interconnected financial institutions pose a greater risk of passing on their failure to other institutions. But do we have any evidence (empirical or theoretical) to support this intuition? How well studied is this? I think my skepticism stems from my understanding that systemic risk is, by definition, non-diversifiable.

Posted by Sandrew | Report as abusive

I do think that the people who caused the problem should pay for the costs. They will be fortunate if they don’t get any jail time. “Oh I just didn’t know” might have worked for a first time teenage driver, but these people knew the risks. I do think the 10 year time frame is too long and a three year payback would be more in line. No need to study further, we just need to put this into effect along with penalties.

Posted by fred5407 | Report as abusive

I can understand the argument that the financial industry should bear the AIG burden, but your article fails (intentionally?) to note that this tax would also have the banks (who have repaid the taxpayer with a profit) to pay for the governments bailout of the auto industry.

Why not pass that tax onto every industry, as we all benefitted from the government intervention… Wait a minute; we already have an income tax…

This is not popular because it is a good idea; it is popular because the administration and the public are placing the blame squarely on the banks, and are looking for revenge. What about the government (which a decade+ ago decided that more Americans needed to have access to mortgages – and pushed Fannie & Freddie to lower there lending standards, what about the consumers who purchase homes they could not afford?). The bankers who benefited from the bloated mortgage and securitization market are long gone.

Do not let the false ease of exclusively blaming financial institutions substitute reason – why should the banks (which have repaid the taxpayer) pay for the bailout of the auto-industry?

Posted by jgalt2010 | Report as abusive

So where is the “Car Bailout Tax”? Shouldn’t we be taxing all cars to pay for the money that GM and Chrysler haven’t paid paid back yet?

Is this the future, anytime someone gets money from the government, then the industry they are part of is subject to a reclamation tax that you know will never sunset.

Posted by ArdvarkMaster | Report as abusive

Do you see auto companies paying out million dollar bonuses to their employees?

To take bailout money on one hand is bad enough, but might be OK if it’s necessary for our collectively benefits; but to give out huge bonuses on the other hand, is just monstrous. It’s not only morally wrong, it’s economically wrong too (hence all the buzz about ‘moral hazard’).

And yes, this is a response to “ArdvarkMaster”. That said, I have to say I agree with “ArdvarkMaster” that it’s spacious to put all the onus on receipts of bailout funds; when it’s painfully clear that the government didn’t demand enough ‘flesh’ or ‘blood’, BEFORE they handed the money out. You know what, when it’s not your money, it’s just so much easier to give away! In that sense, I’m afraid to say that, heaven forbid, I see where the tea-baggers were coming from and I share some of their frustration.

Posted by jian1312 | Report as abusive

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