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Obama administration proposes tax hike on financial firms to recoup cost of bailout

Declaring "we want our money back," President Obama wants to slap a tax on banks to recoup the money that the American public spent on bailing out large financial institutions on the brink of collapse.

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said he supports the administration's plan, but he also is holding hearings 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 argument that the higher taxes might reduce the flow of money to the broader economy. He said some banking activities appeared to have only one purpose: "to simply make money for the people who participate."

He also played down concerns that talent would leave 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 Senate, on the other hand, may not be willing to pass any kind of tax. Legislation to reform financial regulation has been bogged down in the face of Republic opposition and Democratic divisions. Analysts said the proposed tax could face similar difficulties.

"The TARP tax has a very low probability of passage in the Senate, as nearly all Republicans and a sufficient number of Democrats would likely vote against the measure," Paul Miller, a banking analyst with FBR Capital Markets, wrote in a note to clients.

The administration began to develop the proposal in August, but it did not complete work on the tax until earlier this month, waiting until after the largest banks had shown that they were healthy enough to repay federal aid. The law authorizing the bailout required the president to present a plan for recouping losses in 2013, but the senior administration official said there was no reason to wait anymore.

Firms would pay a "Financial Crisis Responsibility Fee" at an annual rate of $1,500 for every $1 million borrowed to finance lending and other activities. The formula would exclude deposits insured by the Federal Deposit Insurance Corp., the largest pool of borrowed money at most banks. A similar calculation would apply to other kinds of financial firms. The tax is designed in part to make borrowing more expensive, reducing the potential profits from using borrowed money to make risky investments.

The tax is structured to fall more heavily on investment banks such as Goldman Sachs and Morgan Stanley. Retail banks such as Wells Fargo and Capital One mostly rely on deposits as a funding source for lending.

"In addition to raising the revenues to ensure that taxpayers are paid back, this is also designed to further the financial reform goals of the president by putting the largest burden on those of the largest size who were taking on the most excessive risk," a senior administration official said before the president's speech.

The financial industry is marshaling opposition. Tom Donohue, president of the U.S. Chamber of Commerce, said bank customers would pay the cost and that higher taxes could tip the nascent economic recovery back into recession.

Representatives of large companies criticized the focus on their firms as unfair. The American Bankers Association also noted in a news release Wednesday that the Treasury Department projected in December that every government program aimed specifically at stabilizing the banking industry would turn a profit. The government expects its losses to result mostly from aid extended to AIG, General Motors and Chrysler, and the cost of mortgage modification efforts.

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