Way back in January of 2010, during his short-lived “fat cat” bashing phase, Obama proposed a tax on the nation’s largest financial institutions with the stated intent of recouping taxpayer losses from the 2008 bank bailouts. Even by that point, the Troubled Asset Relief Program’s price tag was shaping up to be much lower than the original estimate of $300 billion, and it has fallen further since then, dropping below the $20 billion mark according to a Congressional Budget Office report released earlier this year (the Treasury Department, which counts differently, pegs the cost at $53 billion.) But as the Financial Crisis Responsibility Fee’s advocates and enemies will both tell you, the measure is designed to do more than just force Wall Street to settle up with John Q. Public. And with its inclusion in Obama’s newly unveiled populist deficit reduction plan, it’s a good time to revisit why.
One of the conservative gripes about the bank tax when Obama trotted it out early last year was that it was a essentially just an excuse to swell federal coffers. “The Treasury desperately needs revenue to reduce the nation’s massive budget deficits,” wrote Heritage Foundation’s David John at the time. “If the Administration wanted to be candid about their reasoning for placing a ‘fee’ on big banks, they would quote famed bank robber Willie Sutton, who, when asked why he robbed banks, purportedly answered, ‘Because that’s where the money is.’” Actually, the political thinking back then was that the fee was a good response to the first round of credulity-straining Wall Street bonuses since the financial crisis. The White House still says the fee was (and is) about TARP losses, but now it makes no bones about the benefits of at least $30 billion in new revenue over 10 years; it’s right there in Obama’s new plan: “This fee will reduce the deficit by $30 billion over 10 years.”
But assuming the particulars are similar to what Obama proposed in 2010 (the President’s current plan leaves many details out), the fee clearly isn’t just about TARP losses or deficit reduction. While it would be assessed on firms with $50 billion or more in assets–the U.S.’s 10 largest financial firms would bear the brunt–TARP’s biggest losses came from insurance giant AIG and the automakers bailout, not big banks. It’s not really a “Financial Crisis Responsibility Fee” at all. A more accurate title would be the “Make Financial Crises Less Likely Tax.” It takes the most enormous financial institutions in the country, not all of which directly received bailout money, and taxes their total liabilities minus federally insured bank deposits and Tier 1 capital — the very safest assets banks can have, as narrowly defined by regulators — at .15% (in the original proposal at least). That’s a disincentive to both size and leverage, the two primary ingredients of a catastrophically Too Big Too Fail institution, and the real prize of the Financial Crisis Responsibility Fee.
The tax would be temporary — 10 years, or more if all TARP losses aren’t recouped by then — but it’s not hard to imagine a Democratic administration or Congress trying to keep this on the books even after the bailouts are repaid in full. If the policy were to expire, its function as a brake on bank size and leverage would end too. Even after 10 years, as a deficit reducer, it might look like an awfully appealing source of savings compared to cutting food stamps, rejiggering Medicare benefits or raising income taxes. And politically, it’s golden. TARP remains a political albatross and Wall Street is a perennial favorite boogeyman for both parties’ activist bases.
As with the rest of Obama’s newfangled stimulus and deficit reduction plans, it would be a mistake to overstate the chances of the bank tax passing a Republican House of Representatives; they’re pretty much nil. And while Obama never abandoned the Financial Crisis Responsibility Fee — it was included in his budget proposals for fiscal years 2011 and 2012 — he hasn’t talked about it for a while. On Monday, that changed. “We also ask the largest financial firms — companies saved by tax dollars during the financial crisis — to repay the American people for every dime that we spent,” he said. That’s not the whole story. But If his re-election effort is going to rely on a populist contrast with the GOP, it’s likely not the end of the story either.