All Obama Tax Plans on Banks Likely to Be So Porous as to be Sidestepped
Obama Plans to Raise $120 Billion From Banking Fees
By Hans Nichols and Ryan Donmoyer
Bloomberg
Jan. 12 (Bloomberg) -- President Barack Obama plans to raise as much as $120 billion over 10 years through a fee on financial institutions to help recoup losses from the Troubled Asset Relief Program and reduce the federal deficit, according to administration officials.
The White House hasn’t settled on the final structure of the fee and how to target the big banks that have returned to profitability, said the official, who requested anonymity.
The plan is to have revenue from the fee dedicated to deficit reduction and to cover the $120 billion the Treasury Department estimates it will lose from TARP. Details will be contained in the fiscal 2011 budget that Obama will submit to Congress next month, the official said.
The government’s $700 billion rescue plan contributed to a record $1.4 trillion deficit last year.
Tax experts, who discussed the possibilities before the president’s plan was disclosed, say all the administration’s options, which include an income surtax, an excise tax, or a fee pegged on the value of assets or some other measure, are likely to be so porous that financial institutions would be able to sidestep most of them.
“Any new tax is always more complicated than the designers anticipated,” said Ed Kleinbard, the former staff director of Congress’ nonpartisan Joint Committee on Taxation who is now a law professor at the University of Southern California. “When the numbers involved are this large, it’s very difficult to design on the fly.”
‘Unintended Consequences’
Kleinbard said the U.K. is already struggling to make its 50 percent tax on bank employee bonuses of more than 25,000 pounds ($40,400) stick. Some U.K. banks are moving to absorb the tax while London Mayor Boris Johnson frets that higher taxes may drive 9,000 bankers out of the country.
“There’s always a substantial risk of unintended consequences and the risk of simple ineffectiveness,” Kleinbard said.
The administration’s proposal won’t include a tax on Wall Street bonuses or financial-services transactions, Politico reported yesterday, citing unidentified officials.
Canadian Finance Minister Jim Flaherty said today there were no plans to follow the U.S. in imposing a fee on financial institutions to reduce the nation’s budget deficit. Canadian banks weren’t bailed out during the financial crisis and so the fees are “not an issue for us,” Flaherty said.
Banks Rebound
The proposed fee revenue is almost three times what analysts expect the 10 biggest U.S. banks earned in 2009. Those banks, led by Goldman Sachs Group Inc. and Wells Fargo & Co., have reported net income of $41.6 billion through the first nine months of the year. They will likely post combined net income of $3.84 billion in the fourth quarter, according to analysts’ estimates.
Deputy White House press secretary Bill Burton today refused to confirm any administration plans for a bank fee, saying “that’s one idea that’s out there.”
“But as you know from what the president has said, he wants to make sure that taxpayers are made whole on the help that they gave to the banking industry to get them to come out of the crisis,” Burton told reporters.
Profits at financial institutions, which begin reporting earnings later this week, have rebounded and may triple by 2011, according to analyst surveys compiled by Bloomberg News. Charlotte, North Carolina-based Bank of America Corp., the biggest U.S. lender, said last week it expects to pay record bonuses to some investment bankers.
‘Political Measure’
“Clearly this is designed as a political measure,” said Roberton Williams, an economist for the Tax Policy Center, a Washington-based research group run jointly by the Urban Institute and the Brookings Institution. “How much you want to punish and how you go about it is so wide open.”
Several options could be on the table. Piggybacking on the existing corporate income tax is one, Williams and Kleinbard said, although companies without net profits don’t pay any income taxes.
An excise tax would likely be paid regardless of whether an institution is profitable.
Finding something to levy is also challenging, tax experts said. Options range from assets to payroll size to average wages paid to top executives. No matter what basis is chosen, Williams said, companies will try to reduce their use of that particular method.
Wayne Abernathy, executive vice president of the American Bankers Association, said in a telephone interview that an industry-specific fee would create a “real fairness issue,” forcing banks to pay for parts of the bailout that “didn’t work.” In addition, Abernathy said, banks are paying an “excellent” return to the Treasury.
Banks repaid the U.S. $165 billion last year, letting the government recoup about two-thirds of its total investment in the banking system, according to a U.S. Treasury Department report released yesterday.
8% Return
TARP also collected $12.9 billion in fees, dividends and interest, the Treasury said. So far, the U.S. has made an 8 percent return on its bank investments, a Treasury official told reporters.
Representatives for Bank of America, San Francisco-based Wells Fargo, and New York-based Citigroup Inc. and JPMorgan Chase & Co. declined to comment.
“While we have not seen any specific language from the administration, Congress will certainly examine any serious proposals to lower the deficit and recoup even more” of the TARP funds used in the bailout, said Nadeam Elshami, a spokesman for House Speaker Nancy Pelosi, a California Democrat.
John Thain, the former chief executive officer of Merrill Lynch & Co., said in a Bloomberg Television interview yesterday that new taxes are “not necessarily the right way” to resolve the issue of banks becoming “too big to fail.”
Pressure on Bonuses
The administration is also continuing to prod financial firms to tie bonuses to the long-term health of a company by giving the bulk of such compensation in stock as a way to limit risks, White House spokesman Robert Gibbs said.
“There are folks that just continue not to get it” on Wall Street, Gibbs said. Firms that pay large bonuses to executives risk raising public anger, he said.
Still, he said, “there’s a limit to what the president can do” in curbing compensation at firms that aren’t getting government assistance.
To contact the reporters on this story: Hans Nichols in Washington at hnichols2@bloomberg.net; Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net.
Source: Bloomberg
Comments
Bank taxes
A financial tax should seek to do more than recoup TARP losses. It should be aimed at dampening speculation and pluging the gap in the federal budget that was caused by the downturn in the wake of the panic.
The idea that it's futile to tax banks because they're too clever is really interesting. I guess I'm just not clever enough!