President Obama’s plans for taxing big banks is a throwback to the early days of the administration’s efforts to reform the financial system in the wake of the financial crisis.
The plan, effectively a fee on bank size and indebtedness, was previously submitted in a different form by the White House in 2010 as a way to pay for the provisions of the Dodd-Frank financial reform law, which reshaped the country’s financial architecture.
The plan failed in 2010 when Scott Brown, then a Republican senator from Massachusetts, opposed it. His vote was needed to pass the legislation, so the $17 billion-$19 billion levy was taken out of the legislation.
It faces similarly slim odds of becoming law now, with Republicans controlling both the Senate and House.
A spokesman for Rep. Paul Ryan, the chairman of the tax-writing committee in the House, suggested Monday that the GOP was already looking past the proposal that Obama will introduce in his State of the Union address.
“We have to hope that this move is little more than an effort to score some points with his political base, and that we can move on from it quickly to see if we can find real common ground,” wrote Brendan Buck, Ryan’s communications director.
Nevertheless, the proposal, which would raise more than $100 billion from banks in 10 years, is a sign of the Democratic Party’s increasingly populist tone on issues relating to Wall Street.
Rep. Chris Van Hollen, the ranking Democrat on the House Budget Committee, included a swipe at the financial industry in his own tax proposal, which he rolled out last week. Van Hollen, who represents a Washington suburb in Maryland, suggested imposing a 0.1 percent fee on stock trades.
Both Democratic plans would effectively tax Wall Street to generate tax revenue to pay for middle-class tax cuts.
As a result, they are viewed with skepticism by the financial services industry.
“We urge policymakers to reject this tax targeting a small group of companies and instead focus on achieving broad-based, pro-growth tax reform that ensures our economic recovery continues,” said Financial Services Forum President and CEO Rob Nichols in a statement on Obama’s bank tax idea.
Nichols said it would be “counterproductive to layer on one more way to make it more difficult” for banks to rebuild capital and provide credit.
Big banks have roughly doubled the dollar amount of capital and their capital ratios since the crisis, according to the Federal Reserve, meaning they are less reliant on borrowing for their business models. They also have had to comply with a raft of new regulations and restrictions imposed by Dodd-Frank.
Nevertheless, some critics of big banks like JPMorgan Chase and Citigroup argue that they receive a subsidy from the perception that they would receive a government bailout if they failed, allowing them to borrow more cheaply.
A tax on bank borrowing would counteract that subsidy, the White House said in its preview of the proposal.
The proposal would impose a 0.07 percent tax on the liabilities of banks with more than $50 billion in assets, the same cutoff set for enhanced regulatory scrutiny of banks in Dodd-Frank.
The tax “would attach a cost to leverage” for those banks, according to the White House, leading them to raise even more capital rather than resorting to borrowing and make them internalize the costs to the broader economy that would follow a bailout.
Former Treasury Secretary Timothy Geithner cited a similar rationale for a “Financial Crisis Responsibility Fee” during the debate over Dodd-Frank in 2010.
“Enacting this fee now will make it clear to the American people that they will not have to shoulder the direct costs of protecting the economy from future financial failures,” Geithner told a Senate panel then. The fee would have been designed to exclude most small and mid-sized banks, enhancing their competitive position.
