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Taxing Banks, One Way or Another

Today’s news that Sen. Richard Shelby (R-Ala.) cut a deal with Sen. Chris Dodd (D-Conn.) to remove the “bailout fund” — a $50 billion pool taxed from banks to be used by the government to wind down ailing financial firms — came as a surprise to no one in Washington. The Obama administration never really backed the fund, and Democrats were much happier to see it — rather than, say, some consumer protections — struck from the bill. Now, instead of charging big banks ahead of time to have money on hand to use if one fails, the government will use its own funds to be recouped from the bank later. The Federal Deposit Insurance Co. will ask the Treasury for a loan to use when dismantling, say, a Lehman Brothers, and then the taxpayers will be the first counterparty paid back.

Yesterday — at which point everyone on the Hill knew the resolution authority fund was already kaput — Treasury Secretary Timothy Geithner took to the Hill to argue again for the Financial Crisis Responsibility Fee, a 10-year, $90 billion tax on financial firms bigger than $50 billion. The tax would have been related to financial regulatory reform, but not technically part of the Dodd bill. Because of procedural rules, and, more importantly, a lack of political will, the Crisis Responsibility Fee also has been declared dead in the water.

That means that the biggest financial crisis since the Great Depression will likely pass without the federal government imposing bigger taxes on banks — as galling a failure of the reform process as any. For taxes on banks would not only seem just to taxpayers forced to pony up $700 billion to support a cratering financial system; they would aslo help to diminish “too big to fail.” Now, the government subtly rewards bigger financial firms: The bigger the bank, the more other financial institutions believe that the government will step in to save them if they start to falter. (Essentially, the bigger the bank, the less risky the markets perceive it to be.) One easy corrective would have been to tax big firms. Now, it will be in the hands of regulators to ensure they have enough capital on hand, and possibly to require bigger firms to hold a higher percentage of capital. But those provisions will not be written into law either.

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