The Bank Tax Is The First Tax Of Many

The Administration is proposing that large banks pay a tax based on .15% of total assets minus high-quality capital, such as common stock, and disclosed and retained earnings. Federal Deposit Insurance Corp.-covered deposits and insurance-policy reserves would be untaxed because such assets are already subject to federal fees. The burden of this tax would be on the 50 or so largest financial firms in the US including the subsidiaries of foreign banks. The target is firms assets over $50 billion. The White House calls the new levy the “Financial Crisis Responsibility Fee.” It could raise as much as $90 billion over the next ten years.

The idea of this bank tax comes as a new proposal in Congress to tax American bank executive bonuses much the way that the UK has is being considered. There will be more calls to take money from financial firms and their employees for two reasons. The first is the perception that the largest banks are most to blame for the credit crisis that did so much to damage the economy. The second is that the federal government desperately needs the money. It may as well use righteous indignation to get it.

Banks may have enough expert accountants to find a way around some of the tax, but eventually a diligent government is likely to squeeze most of the money out of Goldman Sachs (GS), JPMorgan (JPM) and their peers. The $90 billion won’t be enough to offset even a small part of the deficits the federal government will have over the next decade. The level of the 2009 portion of those deficits is about $1.4 trillion. The ten-year burden of deficits is almost unimaginable.

Several bank CEOs said that using the tax system as a means of punishment is a poor idea. Car companies lost money and needed government capital. They will not be forced to pay the tax. But, that misses the point. The Administration is clever enough to know that populism can seize on the nation’s negative reactions to a number of industries, trends, and national habits to raise taxes that it cannot increase by simply levying new burdens on the average American, or the average American business.

The attempt to raise tax dollars without an increase in the standard individual tax rates will probably take the form of levies on industries and “sin taxes”. The oil industry is a favorite target because of the costs of gasoline, heating oil, and petrochemicals. Exxon did make $4.7 billion in net income in the September quarter. The price of crude is back above $80 which means it have more than doubled in a year.

Another target for higher taxes is likely to be on the sale of cigarettes and liquor. They are easy targets. The Administration can make a strong case that smoking and drinking lead to higher healthcare costs which a reform of the system is not set up to directly address.

High deficits always make Washington scurry to find new sources of income. This time is no different except that the hole to fill is the largest ever.

Douglas A. McIntyre