The Obama administration's proposed tax on large financial institutions is dangerous for both banks and the economy.
The administration's budget proposal would impose a tax of seven basis points on the liabilities of financial institutions with over $50 billion in assets. As a former member of the Senate Finance Committee, I think this proposal could put the entire banking industry, not to mention economic growth, at risk.
The proposal could impact even those banks under the $50 billion mark. This is because the way that Congress writes tax legislation does not always follow the process we all studied in our civics books.
While tax bills are considered in tax committees and on the House and Senate floors, the final product is often rewritten in a closed room by the congressional leadership and senior members of the tax committees. In that closed room, any tax proposal including proposals not included in the bills approved on the House and Senate floors can be considered. Furthermore, because spending programs often require revenue offsets, Congress could be tempted to attach such a tax to a spending bill.
In effect, the President's action has put in play for the foreseeable future the basic concept of some type of revenue-raising through a tax on bank liabilities. And the $50 billion threshold, which everyone knows was arbitrary to begin with, could easily be adjusted up or down, or even removed entirely in that closed room or in a future tax bill.
The stated policy rationale for the proposal, "to discourage excessive borrowing by financial institutions," does not hold up even to minimal scrutiny. The tax applies to the liabilities of these financial institutions including their deposits. Of course, that is how banks fund their loans. It seems more likely the real reason this new tax is being proposed is that the President wanted more revenue to offset his spending proposals. Banks, especially big banks, are easy targets. But it is unfair to assign taxes according to who is unpopular at any given moment. Bankers and for that matter their shareholders, including the millions whose pension funds are invested in banks should be outraged.
It is also bad policy to tax the funding that banks use to make loans to consumers, businesses, governments and nonprofits. Basic economic theory confirms that if you tax something, you get less of it. If you tax the funding of loans, therefore, you will get fewer of them and increase the cost of those that are made. Consumers will buy less; businesses will expand less; and fewer jobs will be created. The timing for such a proposal could not be worse, as our country is now trying to fight our way back to economic growth and job creation. This is particularly true given that banks' ability to lend is already stressed by massive new regulatory and capital requirements.
In fact, I would urge all bankers to call this proposal the "loan tax." Labels are important in Washington. So the next time someone asks you what you think about the bank tax, reply, "Oh, you mean the loan tax."
When I was in the Senate, I saw clearly the importance of my state's banks to the economic well-being of communities throughout Arizona. I hope Congress has the foresight to give the loan tax the burial it deserves.
Former Sen. Jon Kyl is senior of counsel at Covington & Burling. He spent 26 years in Congress and was the Senate Republican Whip and the top Republican on the Senate Finance Committee's Subcommittee on Taxation and Internal Revenue Service Oversight.