I had lunch in a far-off neighborhood today, and the ride back gave me an opportunity to think a bit more quantitatively about the Obama administration’s proposed financial crisis responsibility fee and what’s striking about it on second thought is how small it is. Let me quote the White House fact sheet:
Responsibility Fee Would Remain in Place for 10 Years or Longer if Necessary to Fully Pay Back TARP: The fee – which would go into effect on June 30, 2010 – would last at least 10 years. If the costs have not been recouped after 10 years, the fee would remain in place until they are paid back in full. In addition, the Treasury Department would be asked to report after five years on the effectiveness of the fee as well as its progress in repaying projected TARP losses.
Raise Up to $117 Billion to Repay Projected Cost of TARP: As a result of prudent management and the stabilization of the financial system, the expected cost of the TARP program has dropped dramatically. While the Administration projected a cost of $341 billion as recently as August, it now estimates, under very conservative assumptions, that the cost will be $117 billion—reflecting the $224 billion reduction in the expected cost to the deficit. The proposed fee is expected to raise $117 billion over about 12 years, and $90 billion over the next 10 years.
We’re talking about a measure that’s extremely narrowly tailored to capture the net fiscal cost of the TARP program. Even though that’s a dramatically lower figure than the total social cost of the crash, it might—might—make sense to set our sights so low if the country were swimming in revenue or something. But it’s not. We’ve got to decrease the deficit in the long and medium term. Higher taxes has to be part of the picture. And there’s a good case to be made that shrinking the financial sector would be desirable for larger economic reasons. That makes a tax on finance a larger way to get the higher tax revenue we need. Getting the cash to cover TARP expenditures would be nice, but this is a disappointingly cramped proposal.