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The Obama administration has just proposed a new fee — otherwise known as a tax — on the country's largest financial institutions.
The tax aims to recover the difference between the bailout funds provided to these institutions a year and a half ago and the amounts ultimately returned to the Treasury. In so doing, the tax will allegedly reduce the federal deficit by some $90 billion.
This tax has popular appeal because the bailed-out financial institutions are now earning large profits and appear ready to announce huge bonuses for their executives. Given an unemployment rate of 10%, populist demand to punish bankers and financiers is almost inevitable.
Yet the proposed tax is misguided at every level.
The tax will not fall solely or even mainly on its desired political target, the shareholders and highly paid executives of large financial firms. The true burden of a tax often lands far from its intended target as the target attempts to shift the burden.
In this case, higher taxes mean higher costs and therefore higher prices, so customers (borrowers) will bear some of the burden of the tax. Higher costs (along with limits on compensation) will also induce financial firms to shift their operations overseas, where taxation and regulation are often more benign.
Thus the tax will impose little harm on those that the populist outrage seeks to punish. Instead, the tax will hurt borrowers — an odd move from an administration concerned about a credit crunch — along with the employees of these firms, from middle management to secretaries and janitors.
The proposed tax will also raise less revenue than promised, again because those subject to the tax will take steps to avoid it. Relocation overseas is one approach; accounting gimmickry is another. The net revenue raised may even be negative because the U.S. will not collect income or payroll taxes from those thrown out of work by an exodus of financial institutions.
The new tax will thus fail to promote its stated goals. Worse, it distracts attention from the real issue.
The U.S. made a huge mistake in bailing out the financial industry. Bankruptcy would have been the right way to punish the financial sector for its excesses. High profits and large bonuses are perfectly fine — they are the reward for risk-taking — but only if those reaping the rewards in good times actually pay the piper in bad times.
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Posted By: rwg(10) on 1/14/2010 | 11:52 PM ET
Clinton didn't merely allow Freddie & Fannie to loan money to bad risks and Dodd & Frank didn't just not deal with the problem - they were actively engaged in forcing banks to loan to these bad risks and the banks did the only thing possible - get the junk off their books. Using TARP as an excuse to tax the 50 largest banks is dishonest: most of those banks didn't get TARP money and those that did have paid it back with interest. But it goes along with the rest of O's capital-destroying ideas.
Posted By: niteski(370) on 1/14/2010 | 11:41 PM ET
philly, no they won't remember that Congress allows Freddy and Fannie to buy what it does. The banks and brokers generate what Fannie and Freddy buys. The Fed doesn't make regulations it enforces the regulation created by Congress. The President only signs the regulations that Congress approves. EVERYTHING starts in Congress, I am so glad we are depending on them to fix what THEY messed up. Congress creates the problem, comes to the rescue and creates a bigger one. Bravo.
Posted By: phillyfanatic(30) on 1/14/2010 | 10:38 PM ET
As the horrid 12 months of Obama rolled on, taxes on everything from the dead to trade, energy, cars, and driving the US Debt skyward was a concentrated effort I believe by the anti-free enterprise Dems, Obama and his advisors along with the Dem Congressional minions to take on Health, unite it with a Porkulas, continue to bail out corporations, banks and anything that walked so a perfect storm of hatred toward profit would turn voters to blame capitalism instead of govt. spending and tax plans.
Posted By: phillyfanatic(30) on 1/14/2010 | 10:31 PM ET
I wonder if voters actually remember that Clinton allowed Freddie and Fannie to loan monies to individuals who could never pay it back. Thus, the Housing Bubble. Then Dodd and Frank helped corrupt Fannie and Freddie by not dealing with that problem and so they doubled down. Of course, banks should never have been bailed out but loaning to the poorest of the poor with no profit forthcoming, meant that Dems would once again try the old Class Warfare ploy,. Banks=badness and thus the drive to tax.
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