U.S. bank tax surprisingly isn’t dead on arrival

January 14, 2010

– James Pethokoukis is a Reuters Breakingviews columnist. The opinions expressed are his own. –

The U.S. Congress, particularly the Senate, has been a graveyard for aggressive financial reform. And banks are hoping the new bank levy will suffer a similar fate. They shouldn’t count on it. A clever design and a determined White House push mean Wall Street may have to pay up.

At first glance, the proposal would seem to have no better chance than a number of other relatively tough measures stuck on Capitol Hill. A transaction tax — often called a Tobin tax — and a super-tax on bank bonuses are among ideas that appear to have no future. For each, support in the Senate has been lacking.

But smartly constructed policy can make the politics easier. Legislators see logic in focusing a tax on the liabilities of institutions that make use of hot, wholesale sources of finance. Structurally, that looks a lot like the levies the Federal Deposit Insurance Corp already charges for deposit insurance — and the government’s recent role rescuing banks wasn’t so dissimilar from what FDIC does with deposits.

Also, the tax is supposed to hit investment banks hardest. That means it can be billed as a sort of Goldman Sachs Tax. In Washington as in Hollywood, an obvious villain helps sell a story.

The Obama administration views the tax as a splashy way of touting policies designed to prevent a repeat of the financial crisis. Unable to loudly trumpet an economic recovery as November’s elections loom, a populist battle against Wall Street is seen as the next best boost for Democrat candidates.

Republican objectors will be forced to side with the banks. And there just might be fewer senators willing to do that than Wall Street needs. While there are a couple of Democrats whose support can’t be counted on, Republicans Chuck Grassley of Iowa and Olympia Snowe of Maine co-sponsored a bill last year that would have taxed bonuses at banks that received government help. They and other moderates in the GOP might support the tax if they believed it would help reduce the U.S. deficit.

At the same time, any notion that the bank levy could become a permanent tax would rally Republicans against it. But as things stand, the tax — rather surprisingly — seems to have avoided being seen as dead on arrival.

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