The Administration wants to be certain that taxpayers get back all the money they risked through the TARP program. All of the largest banks which took money from the fund have paid it back, but that still leaves AIG (NYSE:AIG), smaller financial firms, GM and Chrysler.

The program that is likely to be proposed with the new federal budget is that all banks, healthy or not, aided by the federal government or not, will be taxed until the taxpayers have been given a complete refund of the money loaned in the crisis to save the banking system.

No one within the White House or Congress will say what shape a bank tax will take. One suggestion is that banks should pay tolls based on their liabilities. This idea is based on the theory that financial firms with high liabilities are more likely to need government help. Some liabilities are more risky than others. Some represent forms of leverage that make banks extremely profitable for their shareholders and the government to which they pay taxes. Bank liabilities are more complex than Rubik’s Cubes. The Congress has never been adroit  in its ability to fashion complex tax codes. The creation of a bank liability tax and a method of assessing and collecting this new tax will be no different.

Another alternative is to tax profits based on the theory that successful banks can most easily afford taxes. That would, of course, tend to hurt the best run banks, which in many cases are also the most responsibly managed, like JPMorgan (NYSE:JPM) which handled itself admirably through the credit crisis.

The press has already pointed out the most significant problem with a special tax on banks, no matter on what basis it is levied. Banks are masters at passing fees on to customers whether those are credit card customers, large corporations, or home owners.

The UK decided to tax bankers at a 50% rate on most bonuses last year. The US proposes to tax banks. Venezuela simply closes financial firms that do not act in a way that the government believes is in its best interests.

There remains a certain amount of blood lust among politicians and taxpayers who want the banks to pay permanently for the collapse of the credit system. The same anger is not directed at the car companies, which have received substantial sums, especially GM which has taken $50 billion from the government. The public seems to think that the auto companies were the victims of foreign competition, high oil prices, and greedy UAW members. They must have missed the fact that managements of the auto firms repeatedly ignored the signs that consumers wanted high-quality, fuel-efficient cars.

The “bank tax” also ignores the role the regulators and lawmakers played in the devastating financial collapse in late 2008. The credit crisis was clearly the cause of the brutal job losses that occurred through 2009, especially in the construction and manufacturing industries. None of the major financial oversight agencies saw the destructive wave of leverage that was formed out at sea. The government was just as surprised as the financial industry when it hit.

It is simplistic to break the causes of the national deficit into pieces and say that the part due to the rescue operations of the banks must be paid back entirely by the banks. The problem is larger than that. It is often said that solutions to any government deficit fall into only two categories. The first solution is  usually a call to increase taxes.  However, to decrease the deficit aggressively, this would require that taxes on every man, woman, child, and business in the country be increased substantially.

The second solution often mentioned would require that the federal government cut expenditures at a rate which has not been seen in the modern age. Roads would go unpaved.  Public education would become a remnant of what it was when Andrew Carnegie created this system a century ago. The nation’s elderly citizens would have to live on much less government assistance.

The federal government may end up with legislation that taxes banks as part of a eye-for-an-eye approach to running the IRS. But, there are too may eyes in the failed parts of the economy to pluck them all from their sockets.  The nation would then be in utter collapse. 

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.