Trickle Down Theory: Would New Tax on Banks Come Out of Bank Rates?

The White House is said to be weighing alternatives for levying a special tax on banks to recoup some of the taxpayer money that went to bailing out several of the nation's largest banks in 2008 and 2009. This seems like a well-intentioned but misguided idea.

On the surface, there is some logic behind the proposal. First of all, something -- or several things -- will have to be done to address the spiralling federal budget deficit. The two political parties may line up along their usual partisan lines against cutting spending and raising taxes, but ultimately it will take a little of both to rein in the deficit. Second, it seems appropriate that taxpayers should get some return on the money that's been invested in rescuing the banking system. Third, there is certainly populist support behind punishing the banks. This last point isn't logical from an economic standpoint, but it does reflect political expediency.

It's a tough call, especially because the deficit must be addressed or else all Americans will end up paying. It's just that the proposals for taxing either loans or bank profits seem destined to impact bank rates -- the savings account rates, money market rates, and CD rates earned by depositors.

Taxing loans gives banks less incentive to make loans, and thus less incentive to attract deposits by offering higher rates. This also seems like a curious move when the government is trying to encourage banks to start lending again to get the economy moving. As for taxing profits, this will make banks look for costs to cut to restore after-tax profitability -- and bank rates may be one of the victims.

On balance, while a tax on banks may be emotionally satisfying, it seems destined to become largely a tax on depositors.

Showing 0 comments | Add your comment