Tag: bank tax

More Ignorant Senators

By James Kwak

So apparently a JPMorgan Chase analyst thinks that senators showed “an unnerving ignorance of fundamental principles of market economics.” Senator Charles Grassley went one better and showed an unnerving ignorance of how the government’s own budget works.

In a hearing on the administration’s proposal to recover the net costs of TARP through a tax on large banks, Grassley said,

“If a TARP tax is imposed and the money is simply spent, that doesn’t repay taxpayers one cent for TARP losses. It’s just more tax-and-spend big government, while taxpayers foot the bill for Washington’s out-of-control spending.”

Grassley apparently thinks that when the government “spends” money, it doesn’t benefit taxpayers. What does he think the government does? Burn it? Give it to Martians?

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Wall Street Suing over Bank Tax?

Let’s hope this gets laughed out of consideration. According to the New York Times, the Securities Industry and Financial Markets Association is considering a lawsuit on the grounds that “a tax so narrowly focused would penalize a specific group.” The Times articles doesn’t use the words, but I’m guessing they are thinking of claiming that it is a “bill of attainder”–an act of Congress that punishes specific people for alleged wrongdoing, without a judicial process–which is specifically prohibited by the Constitution.

But even leaving aside the fact that the Supreme Court has rarely overturned  anything as a bill of attainder, there are not one, but two barriers in the way. The first is that the original TARP legislation mandated that the government had to recover the costs of TARP from the industry. The second is that the bank tax is really a (too small) tax on large banks that enjoy a too-big-to-fail subsidy from the government. And since the banks enjoy an implicit government guarantee, they should pay a fee for it (in this case, a mere fifteen basis points on uninsured liabilities), both to defray the costs of future bailouts and to (very partially) level the playing field relative to smaller banks without government guarantees. For political reasons, the administration is trying to dress the tax up as punishment for Wall Street, which begins to sound like a bill of attainder. But under the covers, it’s simply sound regulatory policy (though, again, too small).

Update: Greg Mankiw thinks that “on the economic merits, there may be a case for the bank tax” as a means of offsetting the implicit government subsidy for TBTF banks. “It certainly won’t be perfect.  But it is possible that it will be better than doing nothing at all, watching the finance industry expand excessively, and waiting for the next financial crisis and taxpayer bailout.”

By James Kwak

What Goes Around . . .

“The user fee is a partial payment for the implicit guarantee it receives from Uncle Sam. The rationale behind such a fee is that since taxpayers are bearing an implicit risk on [the institution’s] activities, it is reasonable that the federal government recoup fees to pay for that assumption of risk. The main advantage of such a fee is that it would help level the playing field between [the institution] and its fully private competitors.”

What is “[the institution]”? It’s Fannie Mae, and that’s Stephen Moore of the Cato Institute testifying before Congress in 2000 in support of “a ‘user fee’ of 10 to 20 basis points on [Fannie’s and Freddie’s] debt to level the playing field between Fannie and competitors.”

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Thoughts on the Bank Tax

I’m in favor of the bank tax; what’s not to like about extracting $117 billion from large banks to pay for the net costs of TARP? But it’s by no means enough.

Simon covered the main points earlier this morning, so I’ll just add three comments.

1. Why $117 billion? Because that’s the current projected cost of TARP. But everyone realizes that TARP was only a small part of the government response to the financial crisis, and the main budgetary impact of the crisis is not TARP, but the collapse in tax revenues that created our current and projected deficits. So why not raise a lot more?

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Bank Tax Arrives

The Obama administration tipped its hand today – they are planning a new tax of some form on the banking sector.  But the details are deliberately left vague – perhaps “not completely decided” would be a better description.

The NYT’s Room for Debate is running some reactions and suggestions.  The administration is finally getting a small part of its act together – unfortunately too late to make a difference for the current round of bonuses. 

We know there is a G20 process underway looking at ways to measure “excess bank profits” and, with American leadership, this could lead towards a more reasonable tax system for finance.  In the meantime, my point is that taxing bonuses – under today’s circumstances – is not as bad as many people argue, particularly as it lets you target the biggest banks. 

By Simon Johnson