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Taxing Banks to Pay for TARP: Just Playing Politics

Posted By David C. John On January 12, 2010 @ 3:14 pm In Economics | Comments Disabled

It is fun and politically profitable to attack banks and bankers, especially in the wake of a bailout program estimated to have cost American taxpayers some $150 billion. Given this, the plan [1] floated yesterday by the Obama Administration to charge a “fee” (read tax) on financial institutions to cover losses under the TARP program is understandable. That doesn’t make it sensible.

The plan will do nothing to force those responsible for much of TARP’s losses — primarily AIG, General Motors, and Chrysler – to reimburse the Treasury one cent. That money is likely lost [2]. It will, however, force firms that didn’t take bailout money – and those that took money but have already paid it back with interest, to subsidize the money losers.

Worse, it promises to do so in a way that is going to make the financial system less sound, and possibly even make it harder for ordinary Americans to save for retirement.

As reported so far, there’s no word on exactly what form the fee would take, but several potential methods have been mentioned, each worse than the next one.

• Surtax: It could be a surtax on top of existing business taxes, to be paid by firms over a certain size. But this would hit the healthiest firms – those least likely to impose bailout costs. Of course, the mere existence of such a surtax will immediately reduce the stock price of financials that still need to raise capital levels, and are vulnerable to further losses on commercial real estate, consumer products, etc.

• Excise tax: Under an excise tax, assessed on assets, payroll, or perhaps average pay of top executives, firms would be taxed more “equally”. But that means problem institutions will be further weakened and be even more vulnerable to failing. Moreover, excise taxes no doubt will be used to penalize politically unpopular expenses – regardless of justification — increasing government micromanagement.

• Surcharge on financial transactions: A third proposal would be to charge a 0.25 percent tax on all stock, bond or other financial transactions. Unfortunately, this idea would mainly hit the 401(k) type retirement savings accounts of ordinary Americans, for a very high proportion of stock transactions are connected with the management of these accounts. The tax, small as it seems, will be added to the costs paid by these plans, thus further reducing the money that future retirees will have to live on.

This is completely the wrong approach to reducing the swollen deficit, and will inevitably cause more problems than it solves. It is a bad idea being used to score political points, and should be dropped.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/01/12/taxing-banks-to-pay-for-tarp-just-playing-politics/

URLs in this post:

[1] plan: http://www.bloomberg.com/apps/news?pid=20601070&sid=aIwrT6DH8YAw

[2] likely lost: http://www.foundry.org/2009/09/14/auto-bailout-funds-wont-be-repaid-and-thats-not-the-worst-news/

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