The bank tax rises from the dead

By Felix Salmon
February 26, 2014

Back in January 2010, Barack Obama — flanked by Tim Geithner, Larry Summers, and Peter Orszag — unveiled a new tax on big banks, or a “financial crisis responsibility fee”, as he liked to call it. Of course, this being Washington, the initiative never got off the ground, and was largely forgotten — until now:

The biggest U.S. banks and insurance companies would have to pay a quarterly 3.5 basis-point tax on assets exceeding $500 billion under a plan to be unveiled this week by the top Republican tax writer in Congress.

This doesn’t mean the tax is likely to actually see the light of day, of course — but the fact that it has some kind of Republican support has surely breathed new life into a proposal that most of us thought was long dead. After all, the initial proposal was designed around the idea that the tax would allow the government to be repaid for the cost of the TARP program — a goal which has now pretty much been met.

There are some interesting differences between the Obama tax of 2010 and the Dave Camp plan of 2014. The Obama tax was on liabilities; it specifically excluded deposits (which already have a sort-of tax associated with them, in the form of FDIC insurance); and it would have been levied on all financial institutions with more than $50 billion in assets. It was set at 0.15%, and was designed to raise $90 billion over ten years.

The Camp tax, by contrast, is on assets, which means that deposits sort-of get taxed twice; but that means it can also be set much lower, and the size cap be raised much higher, while still raising the same amount of money. Camp’s tax is a mere 0.035%, and is applied only to assets over half a trillion dollars. It’s designed to raise $86 billion over ten years — although, confusingly, the Bloomberg article also says that “it would raise $27 billion more over a decade than the president’s plan would”.

I like the simplicity of the Camp plan, although I would have preferred to tax liabilities rather than assets. After all, it’s not size that’s the real problem, it’s leverage, and it’s always good to give banks an incentive to raise more capital and less debt.

I like the way that it’s targeted: just ten US institutions would account for 100% of the revenues from the tax. The list in full: JPMorgan; Bank of America; Citigroup; Wells Fargo; Goldman Sachs; Morgan Stanley; GE Capital; MetLife; AIG; and Prudential. None of them need to be as big as they are, and between them they’re more than capable of coming up with $9 billion a year to help make up for the fact that they each pose a huge systemic risk to the US economy.

At heart, this is a Pigovian tax on something (too-big-to-fail financial institutions) we don’t want, and often Pigovian taxes are more effective than regulation when it comes to minimizing such things. What’s more, it’s sharp enough to hurt: JPMorgan, for instance, would have ended up paying about 15% of its 2013 net income in this one tax alone.

For exactly that reason, however, I’m still skeptical that the tax will ever actually arrive. Those ten institutions are extremely powerful, and are more than capable of persuading politicians on both sides of the aisle to vote against a tax which singles them out for pecuniary punishment. The tax was a good idea in 2010, and it’s a good idea today. But it has very little chance of ever becoming a reality.

6 comments

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Felix,

Ordinarily I find you one of the best-informed, smartest economics/business bloggers out there, so I am surprised at the way this posting gets bank accounting wrong way round. Deposits, from a bank’s point of view, are liabilities, not assets — they are loans by depositors to the bank, which the bank will have to pay back. Loans, from a bank’s point of view, are assets, though not as risk-free as, say, government bonds because of higher default risk. If the Camp plan actually taxes assets in the bank sense of the term, then it’s true that it isn’t getting at leverage (for that, you’d need to tax loans minus reserves), but it is getting at a rough measure of the biggest, most systemically important institutions.

Posted by historystudent | Report as abusive

Should we conclude the proposal is an attempt to raise campaign contributions rather than taxes?

Posted by MyLord | Report as abusive

It’s not just banks taxes that are needed.

A transaction tax on short-term stock trades is needed to prevent algorithmic trading from unduly distorting stock market values. When 60-70% of all trading by volume cares nothing about the actual value & future prospects of the companies being traded, the argument that the pricing of a stock accurately reflects its value becomes a bit less convincing.

Posted by mfw13 | Report as abusive

Isn’t 3.5bp/quarter pretty much the same rate as 15bp/year?

Posted by niveditas | Report as abusive

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