The legal and necessary bank tax

By Felix Salmon
January 20, 2010
John Carney has a post up today saying that the bank tax is unconstitutional; it's incredibly unconvincing, not least because he ignores the fact that the tax is required by law. Far from being an ex post facto appropriation, it was entirely foreseeable -- and necessary -- from the day the TARP bill was passed.

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John Carney has a post up today saying that the bank tax is unconstitutional; it’s incredibly unconvincing, not least because he ignores the fact that the tax is required by law. Far from being an ex post facto appropriation, it was entirely foreseeable — and necessary — from the day the TARP bill was passed.

His other criteria for the tax being unconstitutional don’t pass much muster either. It’s severe, he says, just on the grounds that it’s a tax which raises revenues. Well yes, that’s the whole point. But it’s not confiscatory: if the banks are paying $145 billion in bonuses this year, they can pretty obviously afford a tax designed to raise $90 billion over ten years.

Is it targeted with punitive intent? Maybe — but no more than any other Pigovian tax which seeks to tax what you want less of. Are taxes on cigarettes targeted and punitive? Does that make them unconstitutional?

And no, the tax is not unavoidable: if the banks decided to fund themselves entirely through deposits and equity, as many smaller banks have done through the ages, then they would have to pay no tax. It’s only when they lever up with wholesale funds that the tax becomes payable.

The tax will not, in and of itself, solve the problem of banks being too big to fail. For that reason, some have attacked it as being inadequate. But it’s a key step in the right direction, and not only constitutional but a very good idea.

Update: Carney responds, at very great length.

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Comments
8 comments so far

Thanks for the clarifications Felix.

Posted by guest | Report as abusive

Sorry, Felix, but you don’t seem to understand attainder well.

Let’s take just one of your objections: the foreseeability of the tax. Actually, this tax was not foreseeable because instead of being directed at the “financial industry” it is directed at firms that took TARP funds and are over a certain size. That’s what makes it a prohibited targeted tax.

Furthermore, even if it was foreseeable, it is still unconstitutional.

Posted by JohnCarney | Report as abusive

I don’t know whether the proposal would be considered a bill of attender but the law requires the President to make a proposal. It does not specify what the form of the tax should be. The fact that a law was passed requiring the President to propose some sort of tax in no way affects the constitutionality and any subsequent proposal. Lots of law have been found unconstitutional.

Personally though I like the tax as it is likely to disadvantage TBTF financial institutions. A more direct attack on the TBTF problem should be undertaken with or without this tax.

Posted by ScottFree | Report as abusive

John,

Next time you should do more robust research before reaching legal conclusions. Felix is much closer to the mark than you are.

I think you lost the argument when you labeled the tax as being many multiples of its actual size (“hundreds of billions” is the new $90 billion, eh?)

First, the statute does not require the President to recover the funds from the financial industry as a whole. It limits who he can recover from to the financial industry, but that’s it.

Second, do you think bankers are stupid? Otherwise “the plan to recoup TARP payments will probably come from TARP beneficiaries” is not just forseeable, its patently obvious. Indeed, given that TARP funds were extended on the condition that they would be recovered through taxes, “recovering TARP funds” seems eminently legitimate to me.

And that the results were forseeable makes it very difficult to argue that the bill was ex post facto. They took the money knowing it would be recovered, and knowing that the fairest way to recover it would be from the TARP recipients. The law may have been ambiguous, but its not being applied retroactively.

Nor does the 10 year limitation mean it isn’t for the legitimate purpose of reducing risk at banks. Uh – its being proposed pursuant to a law that limits the President to seeking TARP losses. Further, there’s a legitimate purpose in helping to reduce the benefits of the reducing the moral hazard subsidy. After all, there’s no guarantee that there will still be a moral hazard play of the same size in ten years, so there’s no reason not to leave it to future legislators.

But in any event, I’m more interested in hearing how you reconcile your arguments that the bill is so severe it is confiscatory and that the President, by failing to make the tax tougher, is proving that his motives are pretextual.

Posted by AnonymousChef | Report as abusive

where do you get that $145 billion number?

Posted by q_is_too_short | Report as abusive

Felix after reading the above comments, I draw one conclusion, the writers are either for or against regulation of big banks, tax.

Now let’s look at it from a 3D perspective. To do this we must make one assumption divided in two parts.

The government is not your friend and currently our government exist to promote more government, hence more power to government, hence less power to the people.

Since I assume the government is not my friend, I will approach the issue from a military point of view and that is, our government has become our enemy, under the guise of protection for the people and risk aversion.

The first question any military person ask when they see the enemies front is what are they hiding. So let’s send out a scout to see what is going on behind the lines.

So, why now does the president propose new laws and regulations? To protect citizens, raise taxes and control banks? Not really here are a few for consideration.

As in any war there are several fronts, major and minor. Each designed to send a different message to the enemy. This is part of a larger plan to win the war. In any war the winning side always loses battles.

After a battle is lost, the winner experiences jubilation, which usually leads to dropping their guard, then the real surprise offensive begins.

So what battle did the American people recently win? The proposed health care reform which was just today declared dead in it’s current form or is it? Where is the new attack coming from?

Regulations and proposed taxes on big banks and other financial institutions.

This does two thing, it takes the spotlight off health care and puts it on the big bad banks. Supposedly this is to protect the American people and prevent a financial crisis.

This proposal has already caused financial markets to decrease in value, hurting the American people. If passed, much of the profits and jobs made by American banks and other financial services, will move overseas. Does this protect Americans, does this create jobs, the only benefit I see is that it creates more government jobs.

UG me scout see possible ambush must be sure, so will continue on mission.

The two fronts we have seen are a smoke screens. A smoke screen is dropped on you’re enemy to keep them from seeing you, the American people have seen the smoke screen of defeated health care reform as a victory.

Wrong.

Any who, I digress, so let me wrap this up.

Bottom line scout thinks the American people are being led into an ambush. This ambush is the complete reversal of power from the people to the government.

Posted by MSGret1 | Report as abusive

I agree with Felix and MSGret1. Remember first and foremost, if you raise the tax on banks, how are the banks going to pay for the increase? Of course they will raise the price for the consumer to use their products in order to maintain their profit line. So saying we are going after the Big Bad Banks is actually going after the people who use the facilities and it becomes but another way to take money from those individuals and gives it to the government.

Posted by rational | Report as abusive

Taxing the banks is a no-brainer. They are given a license to create money, then charge people for its use. This is, IMO unethical and immoral in itself. The bankers have way too many “rights” as it is. The depositors should have rights, too, such as 100% reserve margins at savings institutions so they are not exposed to all of the banking and finance games and schemes unless they wish to be.

Posted by robdashu | Report as abusive
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