Today President Obama will propose a new tax on the nation’s biggest banks, reports today's Washington Post. How will the tax work?
Firms would pay a "Financial Crisis Responsibility Fee" at an annual rate of $1,500 for every $1 million borrowed to finance lending and other activities.
In other words, the Obama Administration is going to punish those greedy banks by making it more expensive for you to borrow money. This is wrong on so many levels, it's hard to know where to begin. Let's start with a point made by Jamie Dimon, CEO at JP Morgan Chase:
"Using tax policy to punish people is a bad idea...All businesses tend to pass their costs on to customers."
Exactly. But don't worry, the Administration thought of that. They have a plan:
But by imposing the tax on only the largest firms, government officials said, they hope to protect consumers. Firms that raised prices would give smaller rivals a competitive advantage, creating an incentive for companies instead to swallow the cost, potentially by reducing employee pay.
Oh, now I see. They will only punish customers of big banks. If I run a small bank, this will now give me an incentive to stay small. I wonder how that will encourage lending.
Beyond that nonsense is the idea that they're "constraining the industry's ability to take large risks and reap outsize rewards". The only reason that banks reaped "outsize rewards" for taking bad risks is because the government encouraged them to do that by guaranteeing mortgage loans. Risk taking got wild when government protected risk takers from feeling the consequences of a bad risk.
Also absurd is the administration’s rationale for taxing banks to pay for losses in TARP.
The government expects its losses to result mostly from aid extended to AIG, General Motors and Chrysler, and the cost of mortgage modification efforts.
The administration decided to exclude the two automakers from the list of firms subject to the tax
The Atlantic's Megan McArdle has it right:
So we ought to tax bank profits because...GM is losing money just like everyone said it would ... I'm failing to see why the banks in particular--or rather the customers of the banks who will enjoy higher fees and lower interest rates--ought to bear the financial cost of the Administration's ill-advised bailout of the UAW.
