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The bank tax: Just another bit of demagoguery

By Peter Morici
web posted January 18, 2010

President Obama is at it again—pandering to rich and powerful political supporters, while portraying himself the guardian of the exchequer and champion of the little guy.

The president says his proposed tax on the capital of the largest banks and financial institutions is intended to recoup the TARP money that has not or will not be repaid.

That is a flagrant attempt to confuse the public on two fronts.

First, the banks the president would tax are repaying their TARP money with interest to the Treasury. Though not all of the TARP money given to the banks has yet to come back, the government will get it all back with a significant profit because the government was paid such generous interest under the terms of the TARP.

Second, the president misused the TARP money by investing in GM and Chrysler, and GMAC, and that is where the government will lose money.

If President Obama were to tax anything to recoup lost TARP funds, it should be cars. However, that would anger the UAW, staunch supporters of the president and Democrats running for Congress.

The bank tax is in response to public outrage over the $150 billion in bonuses paid in 2010 on 2009 bank earnings. The tax would only raise $9 billion in 2010—a pittance compared to the bonuses.

Those bonuses were "earned" trading the $1.5 trillion the biggest banks were loaned by the Federal Reserve at near zero interest rates.

The bankers are screaming about a death wound when the tax is merely a paper cut.

The tax is a bad idea. It won't fix the banks, who continue trading complex derivatives, energy futures and repackaging old mortgage-backed securities instead of making new loans to worthy homeowners and businesses.

The president's tax would let the bankers, who contribute mightily to campaigns of congressional Democrats and President Obama, keep their bonuses after they nearly wrecked the global economy with irresponsible risk taking on the public's tab.

This is horrible public policy and demagoguery.

The proposed bank tax is meaninglessly small, serves no purpose toward reforming the banks, and is merely an attempt by the president to appear on the side of the auto industry and against the banks, when he is really on the side of union organizers and the bankers.

As with the union exemption from the Cadillac tax in the proposed health care reform compromise, the president is putting his political debts ahead of public purpose.

He could propose a 50 percent tax directly on bonuses over $250,000 as the British prime minister plans.

Instead, the president lets the bankers keep their money, and sends Democrats calling for contributions. It's all very insidious.ESR

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.






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