Monday, January 18, 2010

Is the Responsibility Tax Legal?

I have ot tell you, I am no big fan of large banks, I think they take advantage of their size to impose one size fits all solutions to individual circumstances. So, in general I have little sympathy for them. But when the Obama Administration announced a plan to tax big banks (loosely defined of course), I had a big pause. It sounded fishy to me. Tim Cavanaugh points to a number of possible reasons why such a tax would be unconstitutional. Cavanaugh, also made this point:
The targets of the fee are the largest banks, almost all of which have already paid off their TARP loans with interest and purchased their warrants from the Treasury Department. Add to this the limited scope and duration of TARP under the Emergency Economic Stabilization Act of 2008 and you've got pretty limited ground for building a new 10-year tax.
So, in order to ensure compliance with TARP programs directives, the Obama Adminstration seeks to impose a tax. But these banks who have repaid their TARP Loans (the efficacy of which remains questionable) have no further obligation under TARP cannot be forced to pay more.

Imagine this, you go to one of these big banks for a loan for say a new car. The bank gives you the loan of $20,000 (I know, cheap car but bear with me) and you agree to pay the bank 5% interest over five years and pay the whole loan with interest back in five years. You pay back the loan in four years by being diligent and paying a little extra here and there over he four years. Sounds good right.

Well, imaging having paid back the loan and interest in full, the bank decides you have to keep paying for that extra year because the loan period was five years. Such a move would be sure to see that bank in court and in front of the bank regulators for your state and possible the federal government. You would be incensed, wouldn't you?

That is what the federal government is trying to do to the big banks, make them keep paying even though they hae repayed their TARP loan.

Who is the biggest loser in this big bank tax--that's right kiddies--the people who bank with the big banks. Where do you think the bank is going to go to get the funds to pay that tax? To their accountholders in the form of various fees (like this one), lower interest rates for savings accounts (as if they could get any lower) and changes in account contracts. Now big account holders might complian a little, but it is the average Jane and Joe that this is going to hit harder.

Follow on effects could include fewer loans since the bank will have to pay additional taxes, higher interest rates on loans made in order to recoup the some money toward taxes, don't be surprised to see a user fee for things like online bill pay.

I don't know, without further research if the tax is truly unconstitutional, but I will tell you this, it is not wise policy making.

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