President Barack Obama plans to raise as much as $120 billion through a fee on financial institutions to help recoup losses from the Troubled Asset Relief Program and reduce the deficit, according to an administration official.
The White House hasn’t settled on the final structure of the fee and how to target the big banks that have returned to profitability, said the official, who requested anonymity.
The plan is to have revenue from the fee dedicated to deficit reduction and to cover the amount that the Treasury Department estimates it will lose from TARP, which is $120 billion. Details will be contained in the fiscal 2011 budget that Obama will submit to Congress next month, the official said.
The government’s $700 billion rescue plan contributed to a record $1.4 trillion deficit last year.
Tax experts, who discussed the possibilities before the president’s plan was disclosed, say all of the administration’s structural options, which include an income surtax, an excise tax, or a fee pegged on the value of assets or some other measure, are likely to be so porous that financial institutions would be able to sidestep most of them.
“Any new tax is always more complicated than the designers anticipated,” said Ed Kleinbard , the former staff director of Congress’ non-partisan Joint Committee on Taxation who is now a law professor at the University of Southern California. “When the numbers involved are this large, it’s very difficult to design on the fly.”
Kleinbard said the United Kingdom is already struggling to make its 50 per cent tax on bank employee bonuses of more than £25,000 ($40,400) stick. Some UK banks are moving to absorb the tax while London Mayor Boris Johnson frets that higher taxes may drive 9,000 bankers out of the country.
“There’s always a substantial risk of unintended consequences and the risk of simple ineffectiveness,” Kleinbard said.
Details of the plan will be contained in the fiscal 2011 budget that Obama will submit to Congress next month, the administration official said. The proposal won’t include a tax on Wall Street bonuses or financial-services transactions, Politico reported yesterday, citing unidentified officials.
Profits at financial institutions, which begin reporting earnings later this week, have rebounded and may triple by 2011, according to analyst surveys compiled by Bloomberg News. Charlotte, North Carolina-based Bank of America Corp., the biggest US lender, said last week it expects to pay record bonuses to some investment bankers.
“Clearly this is designed as a political measure,” said Roberton Williams, an economist for the Tax Policy Center, a Washington-based research group run jointly by the Urban Institute and Brookings Institution.
“How much you want to punish and how you go about it is so wide open.”
Several options could be on the table. Piggybacking on the existing corporate income tax is one, Williams and Kleinbard said, although companies without net profits don’t pay any income taxes. An excise tax would likely be paid regardless of whether an institution is profitable.
Finding something to levy also is challenging, tax experts said. Options range from assets, to payroll size, to average wages paid to top executives. No matter what basis is chosen, Williams said, companies will try to reduce its use of that particular method.
Wayne Abernathy , executive vice president of the American Bankers Association, said in a telephone interview that an industry-specific fee would create a “real fairness issue,” forcing banks to pay for parts of the bailout that “didn’t work.” In addition, Abernathy said, banks are paying an “excellent” return to the Treasury.
Banks repaid the US $165 billion last year, letting the government recoup about two-thirds of its total investment in the banking system, according to a US Treasury Department report released yesterday. TARP also collected $12.9 billion in fees, dividends and interest, the Treasury said. So far, the US has made an 8 percent return on its bank investments, a Treasury official told reporters.