Why the bank tax is necessary

By Felix Salmon
January 14, 2010
Tim Fernholz links to the official government factsheet on the bank tax, which gives a lot more detail on how it's structured. One thing that jumped out at me is that something along these lines is actually required by law:


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Tim Fernholz links to the official government factsheet on the bank tax, which gives a lot more detail on how it’s structured. One thing that jumped out at me is that something along these lines is actually required by law:

The EESA statute that created the TARP requires that by 2013 the President put forward a plan “that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt.”

In other words, TARP recipients should have known all along that this was coming, and it’s a bit rich for them to start complaining now.

Other details in the factsheet include the $50 billion cut-off in terms of total assets: if you have fewer assets than that, the fee doesn’t apply to you. $50 billion is not Too Big To Fail, but it’s still large enough, the factsheet points out, to exclude anything which could reasonably be considered a community bank. The factsheet also makes it clear that the fee will apply to the US subsidiaries of foreign banks as well as to the foreign subsidiaries of US banks. Does that put US banks at a slight competitive disadvantage globally? Yes, but not enough that you’d notice.

It seems pretty obvious at this point that the arguments against the tax are very weak indeed. Jamie Dimon, for instance, has complained that “using tax policy to punish people is a bad idea” — but he’s going to have to spell out his thesis a lot more clearly than that before he gets anybody but the most knee-jerk anti-tax Republicans on his side. (He’s also damaging his chances of ever becoming Treasury secretary, which I’m happy about: the last thing we need is another Treasury secretary coming straight into the office from the CEO position at a major Wall Street bank.)

The only thing I’m mildly worried about is that the fee is large enough to be passed on to consumers, but small enough that they won’t react by moving their money to a smaller bank. My guess is though that the big banks are maximizing the fees they charge already. Might they lend a little less? That’s possible — but, on the other hand, maybe the fee will force them to lend a little more, and hold less money in cash.

Overall, any harm done by this tax will be minimal, while the benefit is likely to reach a good $100 billion or so. I call that a no-brainer.

Comments
3 comments so far

thanks for pointing out that this was required under EESA. one of my main beefs with taxes after the fact is that they were just that – AFTER the fact, and should have been a part of the initial terms of the TARP. it seems that they WERE!

Posted by KidDynamite | Report as abusive

Hey Kid,
Do you really think the banks would have said no if there was tax disclosed up front – duh
Get real – the banks were finished. The rule of financing is that the last money in, when no one else is there offering money, gets to call the shots and typically all other claimants get a massive haircut or zero. This is called bankruptcy or else !!

This happens daily in funding situations. When a desperate company has only one new financier willing to write a check – guess what ? All others get wiped out. The terms are non-negotiable and the firm can chose to go under or stay alive.

Very simple. Get real. we own the banks and we tell them to jump and they should simple ask HOW HIGH !!!

Posted by strat_80 | Report as abusive

The banks have already or are in the process of repaying TARP. Why aren’t the auto companies, Fannie and Freddie, AIG also subject to the tax?

The tax will lead to shrinking balance sheets, which means less lending. Is that what the administration seeks? The author notes this in passing, but the absence of lending is a mjor risk to the economy.

Posted by semio | Report as abusive
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