Yesterday, Max Baucus (D-MT) and Dave Camp (R-MI) introduced a tax reform bill that would force a new asset tax on big Wall Street banks, and naturally Wall Street isn’t having it.
The summary of the bill alone is about 200 pages, but for the Street, it all boils down to one simple, nasty debate that’s been raging since the financial crisis.
Either Wall Street banks are still too big to fail or they’re not.
And, as a result, either Wall Street banks are getting help from the government in order to survive, or not.
The help is the form of a subsidy that lets Systemically Important Financial Institutions [SIFI] borrow at a lower rates than other financial institutions.
Here’s how the Camp-Baucus bill talks about the issue:
“While tax reform cannot undo Dodd-Frank, it can and should ensure that Wall Street reimburses the American taxpayer for a portion of the subsidy it receives. The Tax Reform Act of 2014 requires that SIFIs reimburse American taxpayers for a portion of this subsidy by:
• Imposing a new excise tax on certain SIFIs, as defined by Dodd-Frank.
• Requiring these institutions to pay a quarterly 0.035-per cent tax on their worldwide consolidated assets in excess of $US500 billion.”
The way Camp and Baucus see it, their policy is essentially returning a portion of the subsidy banks get from the government back to the American people.
The way Wall Street’s men on on The Hill see it, there is no subsidy. Period. And so the tax policy is arbitrary, and will hurt Wall Street’s business.
“Chairman Camp’s proposal for a new tax on banks violates every principle of his stated goals for tax reform,” says Tony Fratto, Managing Partner at Hamilton Place Strategies. “Instead, it will restrict growth, add complexity, and create new distortions. And rather than being broad-based, it’s a bill of attainder for a handful of private businesses. It is bad policy towards financial institutions and would be equally bad policy for oil companies, pharmaceutical companies, or whichever firm happens to be the populist target du jour in this way.”
Those in the ‘there is no subsidy and there is no too big to fail’ camp cite S&P reports that have said the “Likelihood Of A Bailout Is Increasingly Less Likely” — of course, in the same breath the S&P has said that Wall Street banks are still too big to fail.‘
This subsidy debate is not new. Two researchers — Kenichi Ueda of the International Monetary Fundand Beatrice Weder di Mauro of the University of Mainz — wrote that the subsidy lowers bank borrowing costs by 0.8%, ultimately giving banks an additional $US83 billion a year.
The Government Accountability Office is on the case as well. And as Senator Sherrod Brown (D-OH) pointed out in a Senate Banking Committee meeting in January, the GAO came to the conclusion that the banks get a subsidy as well.
“”[I]t should come as no surprise that the Congressional Oversight Panel for TARP found that the six biggest Wall Street banks received a total of $US1.27 trillion in government support,” said Brown, “including accounting for 63 per cent of the Fed’s average daily lending. There are important lessons in this first [GAO] report … First, megabanks borrowed at a discounted rate against assets that the market was not accepting. And the result is a subsidy for the megabanks.“
The GAO is continuing its study of this matter, so that is something that both sides on this debate will be watching closely.
At this time last year, Senator Elizabeth Warren (D-MA) was grilling former Federal Reserve Chair Ben Bernanke about the subsidy during a Senate hearing.
And while he said that the subsidy was created by market forces — specifically the market’s expectation that banks will be bailed out (so yes, too big to fail) — he came to the conclusion that it had to go.
“I think we should get rid of it,” he told Warren.
There is something of a compromise, though, according to Professor Cornelius Hurley, the Director of Boston University Center for Finance, Law & Policy. It’s a bill introduced by Congressman Mike Capuano (D-MA) called the ‘Subsidy Reserve Act.’
The Subsidy Reserve Act is an addition to Dodd-Frank that would require banks to hold even more capital to account for the subsidy they receive — a ‘Subsidy Reserve.’
“Although it is highly unlikely that this new tax will be enacted, one can easily see H.R. 2266, the Subsidy Reserve Plan being a compromise result,” Hurley said in an e-mail, “especially if the GAO subsidy study produces subsidy estimates in the ballpark of Chairman Camp’s.”
But banks already have to hold more capital then ever due to national and international post-crisis regulation. In that sense, both these policies are distasteful to Wall Street.
So its best if the idea of subsidies goes away all together.
But that is just as unlikely as the passage of this tax reform bill.