BankThink

Why the Bank Tax is Wrong

Here we go again.

For the third year in a row, the Obama administration has proposed a tax on the largest financial institutions, despite the fact that it has zero chance of passing Congress. This time, the White House added a twist—more than doubling the proposed size of the tax to $61 billion.

Why is a bank tax needed? The tax is designed to "recoup the costs of the Tarp program as well as discourage excessive risk-taking, as the combination of high levels of risky assets and less stable sources of funding were key contributors to the financial crisis," the Treasury Department says.

This is, to put it politely, incredibly disingenuous. In fact, the bank tax is nothing more than a political tool, an effort to boost President Obama's reelection campaign by once again reminding voters that he is taking a stand against banks. It has nothing to do with the Troubled Asset Relief Program—and it won't make the system safer.

Here's why:

1. Tarp Investments in banks made money for the government

The idea of the bank tax originated with Congress in 2008 when it passed the law that created Tarp. By statute, the president had to propose a way to recoup losses to the government resulting from the $700 billion program. The budget proposal specifically cites this reasoning in its latest proposal, saying it is designed to "recoup the costs of the Tarp program." There's just one problem: Tarp didn't cost the government any money—in fact it made money—at least when it comes to investments in banks.

According to Obama's own budget proposal—yes, the same one that says the tax is needed to recoup costs of Tarp— Treasury invested $245 billion in banking institutions, and has received, as of Dec. 31, $258 billion through repayments, dividends and interest. So let me get this right—we need a bank tax because the government made a profit of $13 billion? In case you are wondering, Tarp may end up losing the government money, but that won't be because of investments in banks—that will be because it was also used to bail out the auto industry. And yet, strangely, I don't see the administration proposing an auto industry fee.

2. A tax would not make the system safer.

Let's look at the other reason for enacting a tax: the administration wants it to "discourage excessive risk-taking." But that's what capital requirements are for, not tax policy. The proposed Basel III capital proposal may be overly complicated, but it is clearly designed to discourage risk. In theory, the riskier an institution, the more capital it has to hold. Granted, we had this concept prior to the financial crisis, and it didn't work very well. But regulators have called for a significant increase in capital requirements, to 7% of common equity by 2019, and the Federal Reserve Board has prodded the largest banks to get there well before then. Just in case they missed something, international regulators have also called for a capital surcharge of between 1% to 2.5% on the largest banks.

Many banks have been fuming about the hike in capital charges, arguing they are too high, but talk to any regulator and it's clear there is actual intellectual rigor behind these numbers. They aren't just making them up out of thin air. By contrast, the Obama administration appears to be doing exactly that. Why is the bank tax $61 billion? What has changed since it was a $30 billion proposal last year? And why, if this is designed to discourage riskiness in the financial system, does it only last for 10 years?

Cutting down on risk is a worthy goal, but using the tax code—a blunt instrument if ever there was one—is completely inappropriate. The entire Dodd-Frank Act was put in place with the express purpose of making the system safer. Is the Obama administration seriously suggesting this bank tax will succeed where that law falls short?

3. The entire exercise is cynical.

The White House can propose this bank tax, even if its justifications are contradictory and illogical, precisely because it knows Congress will never act on it. Even when the Democrats controlled both chambers, they didn't want to touch it. Now that Republicans control the House, the proposal is dead on arrival.

So why bring it up at all? First, President Obama assumes (probably correctly) that Mitt Romney will be the Republican presidential candidate. Even if the bank tax makes absolutely no policy sense—and it doesn't—the idea is popular with much of the electorate. Bringing up the tax again serves to underscore Obama's credentials as someone fighting Wall Street, while portraying Romney as a defender. In short, it's a cheap way to score political points for the presidential campaign.

Secondly, it allows Obama to claim that he has a way to pay for a plan to help homeowners refinance into lower rates. The plan is expected to cost the government $5 billion to $10 billion. Bringing up the bank tax again allows Obama to play Robin Hood, claiming that he is punishing the banks for their wicked ways while funding a politically popular plan to help John and Jane Doe refinance their mortgage.

I've lived in Washington all my life, so I can't say I'm shocked by this rather obvious political ploy. But I'll admit I'm a little disappointed. The financial services industry has a lot of serious issues that need addressing—we don't need to waste time debating and discussing a tax that is both intellectually dishonest and doomed to fail.

Rob Blackwell is the Washington bureau chief of American Banker. The views expressed are his own.

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