Tuesday, February 23, 2010

A Deeper Look at Obama's Plan to Tax the Banks and Wall Street

Obama first announced his plan to tax Wall Street and major financial institutions during his State of the Union address last month. The basic premise of his proposal is to impose a fee on financial institutions that received government money through the TARP program but have made little effort to repay the funds. Since the announcement, there have been plenty of articles written in support and opposition to the tax. To help my blog readers better understand Obama’s proposal, I decided to take a deeper look at his plan and have put together this entry explaining what I discovered.

Fee vs. Tax

During his State of the Union Obama referred to his plan as a “fee” on financial institutions. However, the proposal is actually a new tax, but since the word “tax” elicits such a negative connotation in the minds of most Americans the President intentionally used the word “fee” to help generate support for his proposal. Although the name does not affect the actual legislation, it doest make it more difficult for taxpayers to understand.

Bonus Abuse?

Obama explained that "if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need.”

The proposal definitely stems from the outrage being expressed by Americans in regard to the news stories of excessive bonuses being given to executives of financial institutions that received taxpayer money. However, the idea of targeting these banks specifically has created a lot of legal commotion. Many experts question whether the government should be allowed to institute this new tax, and have expressed concern about the long term effects of giving the federal government the power to levy a tax on one specific group of businesses.

Federal Revenue

In addition to pleasing taxpayers who are angry at banks for giving out large executive bonuses, the tax proposal would also generate a decent amount of federal revenue. Estimates say that the financial institution tax would generate nearly $120 billion over the next decade.

Wall Street Retaliation

One of the more common arguments against the bank tax is that when receiving TARP funds, the financial institutions were under the impression they had until 2013 to begin a repayment plan. However, Obama’s remarks in his State of the Union give the impression that these payments are already overdue.

Mounting Opposition

Although the Democratic leads in Congress have welcomed the bank tax, many Republicans are remaining silent on the proposal. However, financial institutions are already working to prevent the legislation. In addition to sending additional lobbyists to Washington, the largest institutions also have teams of lawyers working to argue that the tax is unconstitutional.

President Obama has already spoken out against the mounting opposition to his proposed bank tax. “Instead of sending a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee,” Obama asserted, “I suggest you might want to consider simply meeting your responsibilities.”

Financial Recovery

Perhaps the biggest question on everyone's mind surrounding the potential fee is whether or not it would help our country’s economic recovery or not. Many Wall Street executives have stressed that they are having a hard enough time recovering, and a new tax would only make more investors weary about spending their money.

Pass-on Fees

Although the popular sentiment among taxpayers is to let Wall Street pay for recovery on Main Street, many economists are predicting that the banks will just pass down the fees to consumers. These financial institutions are for-profit businesses, and will likely find a way to recoup any lost revenue due to new taxes from their customers.

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