The Bank Tax: Hardly Townsfolk with Torches and Pitchforks

The Obama Administration's proposal for a new tax on bank and insurance debt to repay TARP funds is a stroke of policy genius, albeit only an opening gambit.  The best policy is easy to sell, understand and is beneficial to the country and the government.  This tax accomplishes all of that.  The rough outline is that banks and insurance companies with assets in excess of $50 billion would pay .15% interest on all liabilities apart from insured savings deposits or insurance policy reserves and "Tier 1" capital: stock, disclosed cash reserves and retained earnings.  Making the exceptions, rather the inclusions, explicit ensures that all tricky derivative financing will still count as debt.  With one fell swoop this policy will quiet populist outrage at huge bonuses amidst a painful recession, discourage banks from becoming "too big to fail" and raise needed revenues for the government.  Nevertheless, the Obama administration should improve the proposal by toning down the populist rhetoric, making the link to TARP less explicit and increasing the tax rate and generated revenue.

That Republican stayed quiet when the tax demonstrates just how politically toxic big bank are right now.  Liberals, meanwhile, have complained that the bill isn't punitive enough. The representative from Vermont, the only state to have a self-described "socialist" Senator, Peter Welch "introduced a bill Thursday that would impose a 50 percent tax on big bank bonuses and use the money for small-business lending; nearly two dozen lawmakers signed up as co-sponsors. Proposals already pending in the House include a 75 percent tax on bonuses and a new tax on all financial transactions."  With that vengeful passion blowing from his left flank, Obama's decision to sell this bill as a populist justice against rapacious bankers makes sense.  Robert Gibbs laid out the messaging for any recalcitrant legislators: "They can explain that to their constituents and to the American people, if you want to be on the side of big banks, then you're certainly - this is a great country - you're free to do so."  Selling the bill along those lines will be easy, indeed populism is always easy.  However, the righteous working man's anger obscure the central fact of this legislation: it is not particularly onerous to banks and since the original TARP legislation included a provision requiring a tax to repay funds before 2013, it basically just amounts to speeding up a process already in place.

The tax is estimated to raise a negligible $9-10 billion a year for a decade.  The Goldman Sachs annual payroll is double that amount, the national deficit for just the last three months is more than thirty times that much and debt pool subject to the tax is more than 666 times that large.  Selling this tax as a means of reducing bank bonuses might appeal to the baser political instincts of the Democrats, but it remains untrue.  The tax accounts for a tiny percentage of the bonus pool - in fact Goldman had already proposed voluntarily donating nearly as much as its tax liability to charity last year.  Ezra Klein writes that the administration is "reverse Tom Sawyering" the bill, so it seems tough when in fact it is the bare minimum required by the law.  If so, then the bankers are doing a remarkable job of feigning outrage at the concept; JP Morgan Chase's Jamie Dimon said "using tax policy to punish people is a bad idea." 

I think the truth is a compromise: Obama likes the tax for reasons beyond generating modest government revenues, but believes he has to sell it as the “financial crisis responsibility fee.”    The tax has huge advantages over taxing bank bonuses, because rather than just obliging banks to shift executive compensation to untaxed forms like deferred stock, it will create incentives to avoid taking on debt and give smaller banks a slight competitive advantage.  "Too big to fail" should be too big to exist, but the political will to break up the big banks doesn't exist, taxing size at least compensates the country for the risk of having too many eggs in one basket.  Talking about the benefits of the bill, rather than the righteousness of it, could make the conversation center on how much compensation the country deserves for implicitly carrying risky entities like Citibank on its books.  I suspect the answer is quite a bit more than $2 billion dollars a year.  

 The government needs new sources of revenue and this is a great method of providing it.  For now the tax will not change the status quo, perhaps once it is in place it can be improved upon.