Obama Proposes Heavy Tax on Bailout Banks

Sources: FT.com: Don’t Bank on Voters Forgetting; NYtimes.com: taxing Banks for the Bailout; Businessweek.com: Obama Tax Prompts Put-Upon Bankers to Break Out the Violins.

President Obama announced a new tax initiative this week, the focus of which is on recovering total losses resulting from the Troubled Asset Relief Program (TARP) created in October of 2008. Projected losses are estimated at around $90 billion, and the proposed tax would ultimately raise that amount over a span of around ten years. The plan could raise up to $117 billion over twelve years if needed. Obama’s tax would apply only to banks and insurance companies with over $50 million in assets acquired in risk-taking ventures.

Democrats in the House and Senate welcomed President Obama’s announcement, but while the general public sentiment is anti-Wall Street some Democrats are pushing for even more punitive measures to be taken. Democratic Congressman Peter Welch introduced a bill this week that would impose a 50 percent tax rate on all company bonuses over $50,000 at institutions that received TARP funds. The bill has been received with support. This initial success might be due in part to JPMorgan Chase’s announcement of impressive fourth-quarter profits totaling $3.3 billion and in anticipation of Goldman Sachs’ announcement of executive compensation set for early this week.

President Obama’s tax proposal does not include a regulation on employee bonuses, but would create an incentive for banks to stay smaller and to be more responsible with their assets. Banks have by and large responded to the announcement with sharp criticism, making statements that suggested the cost of the tax would serve only to punish consumers, to whom the banks would pass along the cost. However, some suggest that instead of punishing the consumer, the tax will create an opportunity for smaller banks and credit unions to expand their business. The idea is that if TARP banks raise consumer fees, consumers will naturally have an incentive to give their business to banks that do not do so.

President Obama’s tax proposal will be included with his February budget and will require the approval of Congress.

Discussion Questions:

1) Is it true that a small community bank would be able to compete with the largest banks in the industry? While fees might be lower at a credit union, for instance, do those institutions necessarily have the capital or lack the risk-aversion to offer the same loans to small businesses and people with less-than perfect credit ratings?

2) Why do you think banks offer such extravagant bonuses to their top executives? Is there a strategic reason to give bonuses rather than higher salaries? Would a law that taxed employee bonuses like the one introduced by Congressman Welch shield the customer from fee spikes?

3) How would the banking industry change if a company like Wal-Mart was allowed to enter into the banking sector, extending their “everyday low prices” scheme to savings and loan situations?