Recently, the push in Congress to implement a bank tax on the largest financial firms seems to have lost a bit of steam, and the tax is not being included in the financial regulatory reform legislation currently being debated in the Senate. And one of the main arguments against implementing the tax is that it will undermine U.S. competitiveness, as other countries may not impose a similar fee of some kind.
Today, the Senate Finance Committee held a hearing on the bank tax, where Chairman Max Baucus (D-MT) — who has said there’s not much doubt that a bank tax will happen — said that the U.S. should “step up and lead” on this issue, and set an example for the rest of the world:
The U.S. could show more leadership by leading, by acting. You know, if we sit around waiting for all these other countries to agree my guess is not much is going to happen. A lot of countries look to the United States for leadership. If the United States does something that’s reasonable, that leads, I think there’s a good chance other countries will take note of that and try to figure out a way to do something similar, if not exactly the same. Sometimes you’ve got to step up and lead. But you’ve got to talk while you’re leading and listen while you’re leading, but you’ve got to take some action too.
Baucus is correct here. For one thing, the law that created the Troubled Asset Relief Program (TARP) in 2008 stipulates that any money lost through the program must be recouped by a fee on the financial system, so it’s really not a question of whether such a tax will come into being, but when and how. But in addition to the statutory requirement, there are good economic reasons for levying a fee on the biggest financial institutions. It would make the cost of being a large financial institution marginally higher, and would help address the funding advantage that large banks enjoy over their smaller counterparts.
Plus, the tax as currently envisioned by the Obama administration is incredibly small when compared to the vast amount of assets in the banking system. That’s why the Brookings Institution’s Douglas Elliot told the committee that he believes the concern about banks moving their operations offshore in reaction to the tax is overblown:
Banks and thrifts reported $13 trillion of assets to the FDIC, which does not count considerable investment banking and other non‐bank assets. Thus, the industry could cover the $9 billion fee by charging less than an additional 0.1% on each dollar of assets, on a pre‐tax basis, assuming the fee is not tax‐deductible. In practice, the industry might pass along half of this to customers, or approximately 0.05% per dollar of assets, and absorb the other half by taking a 1% hit to income plus non‐interest expense. For comparison, the Fed would never bother with an interest rate move this small, because the effect on the overall economy would be minor.
Republicans have been adamantly opposed to creating a bank tax, while some Democrats are correctly pushing for a permanent levy. The bank tax issue is scheduled to be discussed at the next meeting of the G-20, which is slated for June.