Administration to propose tax on large banks to target risk-taking, bonuses

By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, January 14, 2010

A proposed tax on large banks, which President Obama plans to announce on Thursday, is intended to constrain risk-taking and discourage outsize bonuses, in addition to recouping some of the cost of the government's various bailout programs, officials said.

The administration wants to collect about $120 billion from banks over 10 years, taxing banks based on the amounts they have borrowed to finance lending and other activities, according to officials who agreed to speak before the president's announcement on the condition of anonymity.

Industry executives already warn that hitting banks will hurt the broader economy because banks would seek to impose the cost of any tax on customers. Officials said the tax was designed to encourage a different result: Raising prices to give a competitive advantage to smaller banks, which would not pay the tax, and giving larger banks incentives to borrow less money or pay smaller bonuses to employees.

The administration plans to include the proposed tax in the budget it delivers to Congress in February. What emerges from Congress, however, could be markedly different. Some members of both chambers already are calling for a more punitive tax. Proposals range from a 75 percent levy on bonuses to a toll on financial transactions.

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said he supports the administration's plan. He plans hearings for next week to consider additional ways of curbing compensation, including reversing a cut in the tax rate that applies to the largest bonuses.

Frank said he was unmoved by the industry's argument that higher taxes might reduce the flow of money to the broader economy. He noted that some banking activities appeared to have only one purpose: "to simply make money for the people who participate."

He also downplayed concerns that talent would flee the industry.

"I don't know where people would go for comparable salaries," Frank said. "I guess perhaps they could star in major motion pictures."

The administration started to develop its proposal in August, officials said, but waited to unveil it until the largest banks repaid federal aid, allowing the government to shift focus from stabilizing the industry to recovering its costs. Officials would not say which banks would be taxed.

The proposal is modeled on the fee that the Federal Deposit Insurance Corp. collects from all banks to repay depositors in failed banks. The FDIC fee is based on insured deposits -- the largest funding source for bank activities -- but the new fee would be based on money raised from other sources.

The financial industry already is marshalling a case against the proposal. The American Bankers Association noted that the Treasury Department projected in December that every government program aimed specifically at stabilizing the banking industry would turn a profit. Industry executives said the tax likely would not achieve its stated purpose of placing large banks at a competitive disadvantage.

"Using tax policy to punish people is a bad idea," Jamie Dimon, chief executive of J.P. Morgan Chase, told reporters following his testimony before the Financial Crisis Inquiry Commission. "All businesses tend to pass their costs on to customers."

Staff writer David Cho contributed to this report.

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