The tax, named by the Obama administration as the “financial crisis responsibility fee”, would raise up to $117 billion over the next 12 years. The idea is to repay the taxpayer money spent in the TARP fund (Troubled Asset Relief Fund) to bailout the banking and financial system. The tax will effect 50 banks and insurers with assets of more than $50 billion – 35 American institutions and 15 or so domestic subsidiaries of foreign firms. Each bank will pay 0.15% of its eligible liabilities, which is measured as total assets minus capital and deposits (or, for insurers, policy reserves). Investment banks with few deposits, such as Goldman Sachs and Morgan Stanley, will be hit much harder than commercial banks. President Obama defended the tax, saying in January of 2010, “My commitment is to recover every single dime the American people are owed. And my determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people…We want our money back, and we’re going to get it.” The proposal was met with widespread debate among lawmakers, lobbyists, opinion writers, and international figures, the arguments of which are documented below.
The U.S government used taxpayer’s money to bail out these rampaging banks. Although the banks are vital parts of the U.S economy, they nevertheless needs to repay their debt to the common people, for they owe their very existence as a result of the U.S government bailing them out. Since they borrowed money from the U.S government, it’s justified for the U.S government to get that money back, and to give the money to the taxpayers as a show of gratitude.It’s that simple.
“The rationale behind the tax/fee is basically this: the banks took us to the edge of the abyss because of their excessive risk-taking. Only massive amounts of emergency taxpayer money saved the system from total collapse. Although many of the big banks have already repaid TARP and in doing so, the government made money on those specific investments, there will still be money lost in the plan. The fee attempts to recoup those losses over the next years.”
“A windfall tax is blunt, arbitrary and something supporters of free markets usually instinctively avoid. Even so, following news that Goldman Sachs Group has already set aside a $16.7 billion bonus pool for 2009, the case for windfall taxes on banks that pay giant bonuses is becoming unanswerable. […] This year’s bank profits are windfalls in the purest sense. They aren’t the due rewards for exceptional skill but gifts from taxpayers. Many banks are earning huge, risk-free profits borrowing from central banks at ultralow interest rates and lending back to governments at much-higher rates. If this giant, hidden subsidy was being used to support new lending, fair enough. Instead, it looks destined for bankers’ pockets.”
“In the case of the UK, it now appears highly probable that the Government will eventually recover all the money it injected into individual banks. That is hardly the point. The cost of the banking crisis was much greater than these capital injections. Just look at the size of the national debt.”
The argument here is that the 50 largest banks are unlikely to want to raise prices in the faces of competition from smaller banks that are not subject to the tax. An additional argument along these lines is that banks are not going to want to make the politically unpalatable move of raising prices while paying out major bonuses to themselves.
Republican National Committee Chairman Mel Martinez said on January 15, 2010: “The basis for [the bank tax] is populism. It’s very popular to whack the banks and talk about bonuses and get every dime paid back even though it’s already happening.”
“didn’t taxpayers bail out the financial system, so don’t taxpayers deserve the bonuses? No. Taxpayers (aka voters) were acting in their own interests in bailing out the system. They weren’t doing anybody a favor.”
The U.S. made a huge mistake in bailing out the financial industry. Bankruptcy would have been the right way to punish the financial sector for its excesses. High profits and large bonuses are perfectly fine — they are the reward for risk-taking — but only if those reaping the rewards in good times actually pay the piper in bad times.”
The tax will not fall solely or even mainly on its desired political target, the shareholders and highly paid executives of large financial firms. The true burden of a tax often lands far from its intended target as the target attempts to shift the burden. […] In this case, higher taxes mean higher costs and therefore higher prices, so customers (borrowers) will bear some of the burden of the tax.”
French Finance Minister Christine Lagarde said on January 15, 2010 that U.S. President Barack Obama was justified to propose a bank tax: “[U.S. banks] have dug a $117 billion hole and President Obama is justifiably saying he wants that hole plugged.”
“it’s a good proposal that will raise a significant amount of money ($117 billion over ten years is not, even by today’s standards, trivial).”
“The proposed tax will also raise less revenue than promised, again because those subject to the tax will take steps to avoid it. Relocation overseas is one approach; accounting gimmickry is another. The net revenue raised may even be negative because the U.S. will not collect income or payroll taxes from those thrown out of work by an exodus of financial institutions.”
“The bigger problem, though, is conceptual: Confining the tax to repayment of TARP when we’ve got a massive budget deficit and when further stimulus spending is constrained because no one knows how to pay for it is, well, a huge gift to the banks. There’s just no other way to put it. […] it’s protecting the banks from a much more punitive tax that isn’t limited to money they already have to repay.”
“One thing we have learned over the past couple years is that Washington is not going to let large financial institutions fail. The bailouts of the past will surely lead people to expect bailouts in the future. Bailouts are a specific type of subsidy–a contingent subsidy, but a subsidy nonetheless. […] In the presence of a government subsidy, firms tend to over-expand beyond the point of economic efficiency. In particular, the expectation of a bailout when things go wrong will lead large financial institutions to grow too much and take on too much risk. […] we can offset the effects of the subsidy with a tax. If well written, the new tax law would counteract the effects of the implicit subsidies from expected future bailouts.””One thing we have learned over the past couple years is that Washington is not going to let large financial institutions fail. The bailouts of the past will surely lead people to expect bailouts in the future. Bailouts are a specific type of subsidy–a contingent subsidy, but a subsidy nonetheless. […] In the presence of a government subsidy, firms tend to over-expand beyond the point of economic efficiency. In particular, the expectation of a bailout when things go wrong will lead large financial institutions to grow too much and take on too much risk. […] we can offset the effects of the subsidy with a tax. If well written, the new tax law would counteract the effects of the implicit subsidies from expected future bailouts.”
“The Obama bank levy is intended to do more than punish banks. It will, if it works, not only make banks pay retrospectively for the Troubled Asset Relief Program (TARP) but change their behaviour in the future. The message that state bail-outs will not be cost free should act as a deterrent and the favourable treatment of deposit-taking institutions is designed to make some sorts of business – those the government wishes to encourage – more desirable than others.”
“we question whether it will be structured fairly and if it truly will discourage the kinds of risky behavior that led to the financial crisis — and if that’s even the proper role of this particular tax […] Isn’t it the role of regulation to expose and even prevent the use of the crazy derivatives that led to the recent credit crisis? It’s clear that during this last crisis the markets were incapable of assessing the risk that financial institutions were taking. […] Greater transparency and reporting requirements would give the markets the ability to analyze risks and set value accordingly. […] We’d like to see more progress on those fronts rather than assessing taxes that very well could be passed on to consumers and shareholders.”
Republican National Committee Chairman Mel Martinez said after the announcement of the tax in January of 2010: “This is a significant 10-year tax which may put U.S. banks at a very disadvantageous position in terms of world competition. This is not just for the bonuses this year.”