Wall Street Banks Counting On Republicans To Prevent Bank Tax From Being Revived

A few weeks ago, Tim Fernholz detailed the short life and unfortunate death of the Financial Crisis Responsibility Fee, a bank tax aimed at recouping money lost from the Troubled Asset Relief Program (TARP) from the country’s biggest banks. At the moment, even though the TARP law states that losses must be recouped by some sort of bank fee, the bank tax is not going anywhere. And as Bloomberg reported today, if Wall Street has its way, Republicans will help them keep it that way:

Wall Street is preparing for a Republican surge in Congress that could help it block proposed taxes on banks and investments, blunt new financial regulations and regain some of the lobbying firepower it lost during the financial crisis…If Republicans take over the House, banks will try to stop the push for a tax or fee on the biggest financial companies.

This isn’t all that surprising, as the Republicans have been carrying Wall Street’s water regarding the bank tax since it was proposed by the Obama administration. Remember, when Obama emphasized his intention to implement a bank tax during his last State of the Union, Republicans refused to applaud, and then circulated a letter with the Chamber of Commerce announcing opposition to the tax. They also forced Rep. Barney Frank (D-MA) to strip a bank tax from the Dodd-Frank regulatory reform bill, in order to get it out of conference committee.

There are plenty of good reasons for implementing a bank tax on the biggest financial firms, even if one weren’t required to make up for TARP losses. It would level the playing field a bit between large and small institutions, where smaller ones are currently at a distinct disadvantage, by making it costlier to be a behemoth firm.

As Minneapolis Federal Reserve President Narayana Kocherlakota pointed out, a bank tax would also force huge banks to internalize some of the cost of their risky activities, instead of foisting them onto the public:

Financial institutions fail to internalize all the risks that their investment decisions impose on society. Economists would say that bailouts thereby create a risk ‘externality.’ There is nearly a century of economic thought about how to deal with externalities of various sorts — and the usual answer is through taxation. Taxes are a good response because they create incentives for firms to internalize the costs that would otherwise be external.

A bank tax could also raise some revenue in an age where structural deficits pose a real problem. So with the policy rationale against them, Wall Street is counting on Republicans blocking the fee before it ever sees the light of day again.