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Obama's bank-friendly bank tax

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Apparently, some liberal lawmakers think Obama's proposed bank tax is too small:

Rep. Peter Welch (D-Vt.) introduced a bill Thursday that would impose a 50 percent tax on big bank bonuses and use the money for small-business lending; nearly two dozen lawmakers signed up as co-sponsors. Proposals already pending in the House include a 75 percent tax on bonuses and a new tax on all financial transactions. Meanwhile, House Financial Services Committee Chairman Rep. Barney Frank (D-Mass.), who favors the administration's proposal, is planning to hold hearings next week to consider additional measures.

Good. The more I think on Obama's tax, the more it seems like an almost insulting proposal. TARP repayment is a provision of the TARP law. Moving it up from 2013 to 2010 is not a grand populist maneuver. It's a change in timing. And given that the banks are pulling in record profits right now, it's a change in timing that actually fits their balance sheets.

The bigger problem, though, is conceptual: Confining the tax to repayment of TARP when we've got a massive budget deficit and when further stimulus spending is constrained because no one knows how to pay for it is, well, a huge gift to the banks. There's just no other way to put it.

There are a lot of ways to tax banks, and a lot of reasons to do so. You could do a financial transactions tax, as my college Steve Pearlstein proposes in his column today. You could tax size, creating an enduring disincentive to become too-big-to-fail, and giving consumers a reason to favor small-enough-to-handle banks. But however you do it, you should leave it open-ended so it continues to generate revenue in the future, helping to ease our long-term deficit problem.

Obama's decision to sell this as a vicious attack on the banks seems like reverse-Tom Sawyerism: It's an effort to make everyone believe that this tax is really bad and tough, when it isn't. If anything, it's protecting the banks from a much more punitive tax that isn't limited to money they already have to repay.

Photo credit: By Pablo Martinez Monsivais/Associated Press

By Ezra Klein  |  January 15, 2010; 6:00 PM ET
Categories:  Financial Regulation  
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Comments

This tax proposal is like a 2 cent ante in a poker game. The Obama administration wants Republicans to complain that a 2 cent ante is too rich. They aren't worried about paying the bills with the pot, they want to mock the hell out of the other side for not getting in the game.

This is a maximal political play, going as far right as possible to still get Republicans to reject the idea. That leaves a huge number of voters asking 'Why are Republicans opposed to simply getting the money back?'. Simply squaring up the accounts in the least obtrusive way possible isn't very radical but it does paint the GOP into the corner of backwards looking Do Nothing status quo defenders which is the point of this tax.

Posted by: jamusco | January 15, 2010 6:30 PM | Report abuse

I agree with that the tax doesn't go far enough and yes, it is mildly insulting considering their very continued existence was underwritten by us, the tax-payers. However, The President is going to need every ounce of political capital to tackle his Financial Reform Agenda. This includes bigger, more difficult, significant and substantive regulatory reform. The benefits from Executive Compensation Reform represent a drop in the bucket compared to the benefits of regulatory reform. That's why I think he knows diverting too much political capital to executive compensation is inefficient but touting this tax, though not very significant, will stir populist sentiments, generating more Political Capital.....By the way I friended you on Facebook today...you should accept that for sure.

Posted by: RobMiCa | January 15, 2010 6:36 PM | Report abuse

Or it might leave Republican voters worrythat the Obama administration is too childish to lead: when all one hears is "faster" and "give me more", at some point the other side begins to think "Well... this is as fast and as most as I can go."

It can be negative or positive: if the opposition can go neither further nor faster, an ally is lost. In contrast, the ally who might be able to much faster and much deeper has an advantage.

The Mass. vote might be as popular as little yellow pig day! I'll be holding my breath until the results.

Posted by: rmgregory | January 15, 2010 6:38 PM | Report abuse

Obama's ploy to corner the Republicans attacking repayment of TARP money might work, or it might end up making everyone look bad. It's a risky move.

Posted by: bmull | January 15, 2010 7:05 PM | Report abuse

I just want to know when we're going to get back the money given to AIG, Fannie, Freddie, and last but not least, the UAW via the GM and Chryler bailouts.

Thus far, it's only the banks who have actually, you know, paid back their TARP bailouts. And some of them didn't even want the money to begin with. In what universe does it make sense to punish the banks who have paid back money, punish other financial institutions who never received any money, while simultaneously showering 60 billion more to the unions via the cadillac tax exemption?

Posted by: bgmma50 | January 15, 2010 9:46 PM | Report abuse

As the monopoly provider of fiat currency the U.S. government is not constrained by the deficit. Taxes do not fund spending.

Posted by: nklein1553 | January 15, 2010 11:45 PM | Report abuse

As the monopoly provider of fiat currency the U.S. government is not constrained by the deficit. Taxes do not fund spending.
====================================================
Just to clarify, the provider of the fiat currency is the Federal Reserve Bank, NOT the US Government. The US Government just borrows from the Federal Reserve Bank. At interest of course.
Now....... this whole Bank Tax scam must have written by the bankers themselves. 100% of this tax will be passed on to the bank's customers. They won't pay a single cent of it themselves.
Its absolutely mind boggling that people are cheering this like its actually taxing the banks. Amazing.

Posted by: brattykathyi1 | January 16, 2010 12:06 AM | Report abuse

Obama in advocating a tax on banks is merely posturing as a populist because of his declining approval ratings. This should be clear to most people.

A 50% or higher tax on bonuses at all companies would be the fairest approach. A tax on banks will inevitably be passed on to customers, who will, as usual, be the real losers.

Posted by: Aprogressiveindependent | January 16, 2010 1:15 AM | Report abuse

The talking point on the right is that banks will simply pass on any tax liability to the consumer by raising fees.
I favor taxing banks. How do I respond to the talking point?

Posted by: bdunn1 | January 16, 2010 5:44 AM | Report abuse

People are paid for performance. if my compensation package is based upon that performance and I meet those goals, I don't need King Obummer renegotiating my compensation package downward.

This type of behavior stifles innovation and creativity.

GM, Chrysler and AIG have not paid back TARP. Why should the banks be on the hook for bailing out unions and their jobs?

What's next? Baseball players are making too much in bonuses? After all, don't most MLB parks rely upon taxpayer assistance or favorable tax treatment, that is never re-paid?

This monarchy is a joke and will end in 2012, at the ballot box.

Posted by: Computer_Forensics_Expert_Computer_Expert_Witness | January 16, 2010 5:54 AM | Report abuse

Something is artificially inflating banking's ability to pay extremely high bonuses, even when performance doesn't warrant it.

It seems like congress should be able to figure it out.

If they're competent.

Posted by: postfan1 | January 16, 2010 7:22 AM | Report abuse

YOu obivously haven't been following this subject at all. It is ONLY the banks that HAVE paid back their TARP money - with Interest - that are being taxed - it is GM, Chrysler, AIG, Fannie and Freddie - who haven't and you know - the bets are that the "tax" is going to be used for yet more cash to keep them going. This is nothing but a shell game AND a ploy by Obama and his thugs to keep the "big bad banks" in everyone's mind and keep the Democrats out of the public's wrath during this upcoming election year.
And, oh yes, just who do you think is going to pay for this "tax" - it isn't the banks, it's the middle class who will get lower interest on deposits and higher fees on services.

Posted by: sandynh | January 16, 2010 7:43 AM | Report abuse

I say we put a 50 percent tax on all LIBERALS.

They are the ones trying to dictate who and how I choose health insurance.

They are the ones that are trying to dictate how I drive and how much I pay for that privalige.

They are the ones that re removing my privacy and freedoms by their current leglistative.

Come on liberals. Your great for asking for hand outs with out accepting any responsilibity. Its time you paid the piper.

Posted by: LiberalBasher | January 16, 2010 9:28 AM | Report abuse

While I agree that this tax is pretty small compared to the profits the banks are earning post-bailout, I think proponents of a larger tax or a transaction tax are not realistic. It will be a miracle if Obama's small tax is enacted, a more punitive tax is an impossibility. The Senate simply won't approve it. Dodd this week admitted that creating the CFPA is dead which was the hallmark of the regulatory restructuring plan. The Senate is broken and the requirement for 60 votes to pass anything means nothing gets done.

Posted by: buffysummers | January 16, 2010 10:08 AM | Report abuse

If the tax is designed properly it will be difficult to pass it along to customers. You basically just have to have something that isn't uniform, but designed to discourage behavior you don't like. For example, if you wanted to prevent banks from getting too big to fail you could pass a tax on total revenue of all subsidiaries above a certain amount. All the small banks with revenue below that cutoff would pay nothing. Since the big banks (who are taxed) have to compete with the small ones (who aren't) they would be unable to raise their prices (ie the spread between savings and mortgage rates).

Personally, I've become more in favor of a serious increase in the top marginal income tax rate. Keep the same low rate for dividends/gains so that investors and equity holders (ie risk takers) don't get penalized but go ahead and tax salaries at 80%. Most of the people at that level in Corporate America are just benefiting from cronyism and not really earning the money anyway.

Posted by: bill3 | January 16, 2010 10:53 AM | Report abuse

Not sure if the goal of this tax is to raise a lot of money or to steer banks behavior.

If the goal is to steer behavior, and if it works, then the amount of money actually corrected will not be huge.

If the goal is to collect money, and if the number of banks competing in the market does not significantly change, then the cost will be passed on. Why?

There is already free market competition between banks, and it has not had the effect of suppressing margins to the point where bonuses disappear.

There is no reason to believe that additional expenses on the banks will change this dynamic. The same banks will be competing, and the lowest margins will remain the same, and the costs will be passed on.

And consumers will ultimately end up paying for the bailout twice.

Posted by: EdSchechter | January 16, 2010 11:11 AM | Report abuse

@brattykathyi1

Point taken. Although, despite the Federal Reserve board's independence I can't see it refusing to allocate funds to the Treasury Department if requested. The director of Argentina's Central Bank just tried that last week and was promptly fired. I should have been more clear in stating the Federal Reserve is an arm of the U.S. government, not the government itself.

As for Treasury paying interest on money it "borrows" from the Federal Reserve, this is a purely voluntary constraint. Bill Mitchell, who is an Australian economist who writes about modern monetary theory, had an interesting discussion of this point here:

http://bilbo.economicoutlook.net/blog/?p=6891

Posted by: nklein1553 | January 16, 2010 11:24 AM | Report abuse

For those who would argue the large investment banks who have paid back their share of the TARP funds they received and should therefore be left alone I've got news for you. The $750 billion in direct assistance the big investment banks and AIG received (minus the money the automakers received) is just the tip of the bailout iceberg. There’s also the interest rate spread subsidy, the myriad Fed programs to take toxic assets off the balance sheets of troubled institutions, the interest being paid on excess reserves at their Federal Reserve accounts, and the federal government’s implicit and explicit guarantee of TBTF institution’s liabilities to take into consideration. The real price of the government’s actions over the past two years has been the opportunity cost of providing essentially free credit to the FIRE side of the U.S. economy while squeezing the productive side (note, I’m not saying that the FIRE side of our economy is completely useless, only that its primary purpose is to facilitate production of actual goods and services, not to create goods and services itself).

Let's be clear about the numbers here; the Federal Reserve has provided in excess of $20 trillion in liquidity to the financial service sector of the U.S. economy. Even if none of that $20 trillion is ever spent (a very dubious supposition) the cost of providing this liquidity was not providing it to other parts of the economy. That is the definition of opportunity cost, and it is an HUGE price to pay, absolutely dwarfing the comparatively tiny cost of the direct TARP rescue package. If the United States is ever going to recover, the federal government needs to stop SHOWERING the FIRE side of U.S. economy with resources and start investing in the part of the economy that actually produces things.

Posted by: nklein1553 | January 16, 2010 11:43 AM | Report abuse

From day one, Obama seemed much happier being cozy with the banks than dealing seriously with their problems. Obama has effectively been little more than Bush's third term. He makes a few populist gestures and pretends to chastise banks, but really it's little more than business as usual, so this weak tax and disinterest in addressing bonuses is no real surprise.

Posted by: blert | January 16, 2010 12:44 PM | Report abuse

Trying to persuade the people on Wall Street to do the right thing, makes about as much sense as trying to convince a child molester to stop molesting children because it is morally wrong. The only way to control the greedy scum on Wall Street is through fear, the fear of going to jail or the fear punishing fines. They are sociopaths and nothing else will work.

Posted by: ecomcon | January 16, 2010 12:58 PM | Report abuse

Pay for performance is cited as a reason not to tax banks. I will agree when those who generate the most profits in companies get the increases rather than overpaid CEO and Stockbrokers. These folks never in history have produced wealth: The workers, the engineers, the coders and the scientists create wealth in our society. In very few cases do these folks get a share in the wealth they create.

Punish the banks more. They've earned it.

Posted by: rmtaylor2 | January 16, 2010 2:22 PM | Report abuse

What idiocy. These banks wont make loans to small businesses in this country. Their credit card schemes amount to criminal usury and the bonuses these crooks award themselves are so outlandish that they turn our stomaches. The appropriate way to deal with this situation is to get money flowing in *American* the economy again. The Fed should inject that money directly, making 5% interest loans directly or through the Small Business Administration, to small businesses. Establish a system for credit unions to issue credit cards, bi-passing these banks, at rates capped at 12%. Cut the mega-banks off from any and all federal money and starve them to death, or make use of the Sherman Antitrust laws and break them up.

Posted by: mibrooks27 | January 16, 2010 2:29 PM | Report abuse

The proposed Obama tax doesn't come anywhere near getting our money back - we're out some many trillions of dollars so far because of the financial recklessness of our financial institutions, and they today owe their very survival to our help. That's called an externality. Tax the survivors, and tax them seriously. But even that's not enough. We need to make those reckless actions illegal - derivatives, CMOs, counterparty obligations, compromised debt ratings, selling securities while making corporate bets against their health, the list is real long.

Posted by: jpriestly | January 16, 2010 3:27 PM | Report abuse

Any tax on the bank will get passed on to the depositors in the form of higher fees. I have a deposit at one of the big banks and fees have already gone up. I almost laughed out loud when I heard Obama caution against passing on the fees.
A better solution would be to simply break up the banks that are too big to fail. At some point, Obama is going to have to get serious.

Posted by: invention13 | January 16, 2010 3:34 PM | Report abuse

Computer_forensic_blablabla wrote re taxing bank bonuses: "This type of behavior stifles innovation and creativity."

I think the "innovation and creativity" of the banks has been amply demonstrated lately, and heaven prevent any more of it. In my opinion, not only should the "bonuses" be taxed to the max, preferably confiscated altogether, but the bankers lined up against a wall and shot. First plata, then plomo.

Unfortunately, this is neither France in 1793 or Russia in 1917, but capitalist America where bankers and other thieves are coddled and rescued whenever they commit crimes such as that which blew up the housing market.

Posted by: RichardHode | January 16, 2010 7:41 PM | Report abuse

The argument that the tax will just be passed on to customers is deflated a little when you consider that only a small number of the largest banks will have to pay this tax.

The customers can just take their business to a bank or credit union not subject to the tax.

Posted by: julie18 | January 16, 2010 9:14 PM | Report abuse

Big Pharma got a deal; UAW got a deal; anti-abortion groups got a deal; the Wall Street entities, largely responsible for the meltdown, got a real sweetheart of a deal. Now they are being asked to give back a little because of the backlash from main street and they are squawking! The president loves the bankers. His staff includes a number of former men and women from Wall Street. C'mon you guys, cut him a little slack.

And then there are those who are dreaming about a change in the White House and Congress in 2012. That could happen, but that would not mean a change in the way our system works. One group of venal politicians would be replaced by another.

Posted by: probashi | January 16, 2010 9:40 PM | Report abuse

I didn't know that banks actually went to your place of residence and forced you to take their money under threat of harm or duress. Oh ... wait a minute, only the GOVERNMENT can do that ... right ?? I thought that there was still a modicum of personal responsibility in this country. Maybe I'm wrong but if you sign on the dotted line you better darn well know the potential consequences. Banks loan money ... that is their purpose, the choice to pursue said loans is completely at the discretion of the consumer. Let's see these government/union - owned companies fulfill their obligations before we start worrying about taxing the big bad bankers.

Posted by: cunn9305 | January 16, 2010 9:43 PM | Report abuse

are you crazzzzzzy Klein???? This tax first off all will pull 1 trillion dollars out of the economy with this stupidity. Banks for every dollar of deposit lend out 10 dollars. Easy to figure, 100B in taxes puts 1 trillion out of reach to lend.

Let's see, trying to recover from a deep recession, oh yeah let's tax the producers.
Gee, how stupid can you get?

The banks paid TARP back, now they want to penalize them for it, many took it with a gun to their head. When is Fannie and Fredie going to come to the table, and bonus money, the two CEO will draw 6m in bonus, where is the outrage for that.

We cannot continue to punish the producers and not have them thumb their collective fingers at us.

FERV888

Posted by: rayr1 | January 16, 2010 10:24 PM | Report abuse

Can we include a 75% tax on all lobby and campaign money collected by politicians?

Posted by: Jodigirl | January 17, 2010 10:20 AM | Report abuse

The banks should form a union then Stinky(BO) will be hands off. Before you know it, Stinky and his clown posse will have a 100% tax on anyone that is not a supporter of his. I cant wait for the looney lefts outrage when all this wonderful taxes they support are passesw on to the average citizen...

Posted by: biorep1 | January 17, 2010 10:23 AM | Report abuse

Ezra, interesting post. One point that Obama shouldn't obscure is that the estimated cost of TARP, strictly speaking, is mostly the auto companies. This is nowhere near the true cost to the country of financial instability, so its the wrong measure: both too much (re TARP) and too little (re future bailouts). Surely this tax can be made to serve financial regulation reform, making sure that financial firms continue to be a source of funding for government programs. This tax is certainly the "letting off the hook" that you describe (see Spitzer for same w/ equity research) but that doesn't mean that it won't also harm the industry, killing a golden goose. Without a sensible rationale for the tax, future politicians will be sorely tempted to just stuff it to the banks, potentially undermining the system.

Posted by: iragui | January 17, 2010 3:46 PM | Report abuse

Does the term Good Cop-Bad Cop ring a bell?

Obama and the democratic Party majority in Concress are singing from the same score, but the Soloist gets to do the friendly, pretty stuff while the chorus carries the bulk of the drama of the Oratorio.

Does it matter if BHO decides to ask for a little tax and Congress inflates it to something that actually causes groans of pain from the Most Comfortable audience?

The Heads of America's biggest financial institutions are SO out of touch with the world in general and the world of finance in particular that they can't see that anything unusual, let alone wrong, happened over the last year and a half, and are dumbfounded that ANYONE might think their bonuses excessive.

So with Congress looking for fresh sources of revenues they behave like spoiled teenagers, doing whatever they can to annoy the common taxpayer. So WHEN an excess income tax, and an excess risk premium, and a moderate financial transaction tax, and a windfall profits tax all eventually surface and get written into law, will it make any difference that Obama says he can live with them, but HE would have been a bit more lenient? Until the Republicans try to use the results to attack him in 2012. Then what can they say, he didn't ask for enough taxes? When all those taxes bring revenues and expenses within a years budget or so of going back in the black, whatever the Republicans decide to run on bumps against the results of four years of undoing Buashenomics. Reality ought to win.

Posted by: ceflynline | January 17, 2010 8:06 PM | Report abuse

"Any tax on the bank will get passed on to the depositors in the form of higher fees. I have a deposit at one of the big banks and fees have already gone up. I almost laughed out loud when I heard Obama caution against passing on the fees. A better solution would be to simply break up the banks that are too big to fail. At some point, Obama is going to have to get serious. Posted by: invention13"

Well, sir, supposing you decide that YOU aren't foolish enough to pay those extra fees and decamp for a smaller bank that charges smaller fees. Suppose thousands of your friends do the same.

1 Your old bank becomes somewhat smaller.

2 Your new bank becomes somewaht larger.

3 There is now just a bit more competition in the banking industry, and both your old bank and your new bank have to be a bit nicer th their customers.

It didn't cost a single dollar to a single antitrust lawyer to do the legal work necessary to break up those big banks. In fact, by increasing the Income of the United States, instead of paying it out, the Prez has reduced the size of your BIG bank to smaller, and therefore less likely to be deemed "Too Big to Fail"

Which IS what we want, isn't it?

Posted by: ceflynline | January 17, 2010 8:14 PM | Report abuse

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