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Friday, June 4, 2010

Bank Tax May Be a Crowd-Pleaser, but It Isn't Fair

A recent posting What the banks owe America on the Washington Post “Post Partisan” blog caught my attention. Charles Lane makes the point that a Congressional proposal to tax banks to recoup losses from the TARP program “looks like an exercise in punitive populism.” Lane uses Treasury’s own numbers to show that the losses on TARP are not coming from banks, but from the auto companies, government mortgage relief programs, and AIG (which is an insurance company).

In fact, had TARP been limited to the banking industry, there would be no losses on that program. Treasury Secretary Geithner, in Testimony before the Senate Finance Committee on May 4, 2010 confirmed that taxpayers are benefiting from the investments made in banks: “...independent analysts’ look at the total return for the taxpayer in those [bank-TARP] programs would show that it is a very very high return.”

The story doesn’t end here, though. At that same hearing, I testified to the broader impacts that such a tax would have. The tax – proposed to be $90 to $117 billion over 10 years – directly reduces funding that would have otherwise been available for loans. Even worse, since $1 of bank capital can support up to $10 in lending, the simple translation is that it could mean up to $1 trillion in loans not made over the 10-year period of the tax.

Certainly, it is hard to know precisely what level of lending is ultimately not made, but the connection is direct and the impact is real. Even if it is only half of this amount, the potential impact is very large and has consequences for jobs in this economy. For example, the Congressional Budget Office estimated that the $787 billion stimulus in the American Recovery and Reinvestment Act “increased the number of full-time-equivalent jobs by 1.8 million to 4.1 million compared with what those amounts would have been otherwise.” Using that same relationship, the loss of $500 billion in loans would translate into between 1.1 million and 2.6 million in lost jobs over the 10-year period.

It’s important to consider all the impacts of these proposals to tax banks. Lane summed it up: “While it may be a crowd-pleaser, this particular proposal has never struck me as entirely fair.”

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