Many Americans, including the 66% who live paycheck to paycheck, support President Obama's bold tax initiatives. Higher capital gains taxes and more appropriate taxation on inherited wealth have broad popular appeal particularly if the proceeds are used to improve educational opportunities and expand other chances for upward mobility among low- and middle-income Americans.
The president's plan to impose a 0.07% tax on the liabilities of all banks with $50 billion or more in assets may also draw a lot of support. But this populist idea has some structural flaws to which community leaders should be alert.
As the National Diversity Coalition testified at a December hearing on the Economic Growth and Regulatory Paperwork Reduction Act, a bank with $50 billion in assets is not necessarily systemically important. We believe the threshold should be increased to $100 billion, thereby relieving banks below that ceiling of regulatory burdens that cost them millions of dollars each year.
Moreover, we believe that it is necessary to increase the asset threshold at which a financial institution is defined as a community bank, given inflation and other realities since the Community Reinvestment Act was passed almost 38 years ago. We propose raising the threshold to $25 billion, up from the current ceiling of $10 billion.
Consistent with our testimony at the EGRPRA hearing, we urge both the president and Senate Democrats and Republicans to consider more realistic asset thresholds before imposing onerous taxes or restrictions on banks, particularly banks that achieve "outstanding" CRA ratings.
Our proposal, which we believe can be made revenue-neutral through a graduated tax, would be to exempt any bank with under $100 billion in assets from the tax. For those banks with $250 billion or less in assets, the tax should be reduced by approximately 28%, to 0.05%. For banks with between $250 billion and $500 billion in assets, such as Capital One and U.S. Bancorp, the tax could remain at 0.07%.
Finally, for the banks that are truly too big to fail which manage almost half of all U.S. banking assets, and therefore half the risk the tax could be increased to as high as 0.1%.
This graduated tax could effectively address the bipartisan issue of reducing the size of TBTF banks and might well encourage Citigroup and JPMorgan Chase to split into four or more separate banks, as some investors have suggested.
If the president and Congress wish to further minimize risk to the financial system and create more competition among the 100 largest banks, they might consider adding a surtax on liability risks for any institution with more than $1 trillion in assets. Many of the most prominent and successful international banks have succeeded with under $1 trillion in assets, such as Royal Bank of Canada and Toronto-Dominion Bank.
We believe that this graduated tax could maximize competition among the 100 largest banks and help level the playing field for additional banks that are near the $50 billion threshold but are holding back for fear of being labeled systemically important. Furthermore, we believe the graduated tax would provide these banks with the assets and competitive tax advantages to effectively compete with megabanks in specific regions.
In light of Treasury Secretary Jack Lew's recent statements regarding the potential for strong bipartisan support for business tax reform, we believe this tax plan has a strong chance of success. But it is important to make sure that it is implemented in such a way that it curbs risk without punishing the banks that pose little threat to the financial system.
Gilbert Vasquez is the chairman of the Los Angeles Latino Chamber of Commerce and chairman of the largest Latino CPA firm in the nation, Vasquez and Co. LLP. Faith Bautista is the president and chief executive of the National Asian American Coalition. Both are members of the National Diversity Coalition, a coalition of minority faith-based organizations, business chambers and nonprofits.