The New Bank Tax
Banking stocks have been all over the place in recent days as investors find themselves in a toss up of whether or not to own financial shares going into what could be a new tax on the largest banks. In an attempt to recover lost TARP money, the administration is considering a new bank tax on firms with over $50 billion in assets to make up for unreturned bailout funds.
The 3 Effects of Taxation
Uncertainty
The first effect of taxation is uncertainty. Investors don’t know the impacts of the tax, the cost of the tax, when it might be implemented (if at all) or how it might be expanded after it is signed into law. All of these components comprise the element of uncertainty which is possibly the worst effect of taxation on business.
Inefficient Market
Taxation is not a natural part of market and thus creates inefficiency in its wake. Since the tax is to be charged on only the largest banks, it will be the larger banks that become more expensive for their customers while smaller banks enjoy the benefits. (Reverse regulation, anyone?) Also, the tax will be passed directly to customers, creating even greater costs for anyone/any enterprise with a bank account and thus rippling through the entire economy.
Redistribution
The third and final effect of taxation is redistribution. As it is virtually impossible for everyone to pay any tax equally, often one entity benefits from taxation while another one pays the price. In the case of the new bank fee, large investment/commercial banking institutions will pay the fee while GSE’s Fannie and Freddie and the automakers enjoy the benefits of the bailout without additional taxation.
Good thoughts. But you miss something that most everyone is missing. Paying back money the government paid you is not that same as being innocent. First we know that much of the money “sent to AIG” just went directly to Goldman Sachs and others. Those big banks had taken risks and the only way those risks paid off was with billions from taxpayers. Without that they would have been bankrupt. And then when they paid the money they received directly they still haven’t paid back the billions they got from taxpayers (via AIG).
Second, rates have been kept artificially low, to among other things, allow the big banks to make tens of billions (and costing savers tens of billions). Those savers have not been reimbursed for the losses caused by the big banks.
And third if I gamble with money from my company and win my bet on the Super Bowl and then put the money back, I am still not innocent. Just because many of the big banks have paid back the money they were given directly by taxpayers does not mean they didn’t get huge benefits from the government. Pretending they are not bad guys because after ruining the economy, costing millions of people their jobs and savings, getting many benefits from the government, they then pay back the direct cash payments is not accurate.
Now if you don’t believe they should be subject to a special tax that is perfectly fine. It just isn’t accurate to say they are the not the “bad guys.” It is silly that we allowed non-banks to become “banks” and take billions of taxpayers dollars. And Fannie and Freddie are huge problems that we have failed to address, sadly.
The tax can also become part of the system. It is a much more natural fit than the special favors granted the non “bad guys.” Those companies would all be out of business today. It is perfectly in line with economic theory to have taxes to deal with negative externalities.