U.S. President Barack Obama today (Thursday) unveiled the widely anticipated "Financial Crisis Responsibility Fee," which effectively amounts to a tax on banks to pay back money the government lost on the Troubled Asset Relief Program (TARP).
The fee would apply to financial firms - both domestic firms and U.S. subsidiaries of foreign companies - with more than $50 billion in consolidated assets, and equate to 15 basis points, or 0.15% of a company's covered liabilities each year. Deposits assessed by the Federal Deposit Insurance Corp. (FDIC) would not count toward those liabilities.
The tax, which must be approved by Congress, would go into effect on June 30, 2010, and earn about $90 billion over 10 years, but could go on longer. The White House said collecting $117 billion would take about 12 years.
"My commitment is to recover every single dime the American people are owed," Obama said in a speech that was colored with populist rhetoric. "And my determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at the very firms who owe their continued existence to the American people - who have not been made whole, and who continue to face real hardship in this recession."
Obama pointed to the irresponsible lending and money management that nearly caused "a second great depression" as justification for the tax, calling the TARP program "a distasteful but necessary thing to do."
"We're already hearing a hew and cry from Wall Street suggesting that this proposed fee is not only unwelcome but unfair, that by some twisted logic it is more appropriate for the American people to bear the cost of the bailout rather than the industry that benefited from it, even though these executives are out there giving themselves huge bonuses," he said.
The president noted that small, community banks will not be affected by the tax, as 60% of the revenue will come from the 10 largest financial firms. However, critics contend the fees would be applied to banks that repaid their bailout money, or never sought it in the first place.
What's more is that the added tax could only have a negative effect on the economy.
The U.S. Chamber of Commerce sent a letter to administration officials saying the tax would have unintended consequences that "may cost the government more than it hopes to raise."
"While the Chamber agrees that TARP funds should be recouped and excessive risk curbed, we are extremely concerned about a proposed bank tax because it may restrict the liquidity needed by small businesses to fuel job creation and economic growth," said the chamber's letter.
There's also the possibility that banks will sidestep the tax entirely, or find a loophole.
"Any new tax is always more complicated than the designers anticipated," Ed Kleinbard, the former staff director of Congress' non-partisan Joint Committee on Taxation who is now a law professor at the University of Southern California, told Bloomberg. "When the numbers involved are this large, it's very difficult to design on the fly."
Kleinbard pointed out that Britain and France are already struggling to enforce their respective "super-taxes," which amount to 50% of any discretionary bonuses greater than $40,000 (25,000 pounds or 27,000 euros).
"There's always a substantial risk of unintended consequences and the risk of simple ineffectiveness," Kleinbard said.
News & Related Story Links:
- WhiteHouse.gov:
President Obama Proposes Financial Crisis Responsibility Fee to Recoup Every Last Penny for American Taxpayers
- Money Morning:
Banking's Bigwigs Called to Carpet as Obama Prepares New Bank Tax
- Money Morning:
Obama Bank Tax No Reason to Flee Financials
- Bloomberg:
Obama Plans to Raise $120 Billion From Banking Fees