A Tax by Any Other Name Would Smell Just as Foul

With the financial regulation bill in jeopardy due to centrist Senate Republican anger over a proposed $19 billion tax on large Wall Street firms, Democrats are scrambling to find an alternative. According to John Carney over at CNBC, sources indicate two possibilities are under consideration. Neither of them involves spending cuts elsewhere. One would utilize TARP money, while the other relies on higher bank assessments by the FDIC. If Republicans really worry about taxes, then they should accept neither alternative.

Here's Carney reporting:

One alternative would be for the fee, which is officially called the "Financial Crisis Special Assessment," to be linked closely to the receipt of TARP funds. But with many of the largest TARP recipients having repaid the capital injections, it's not clear that this would raise enough funds.

The second alternative under consideration is to replace the new fee with an upward adjustment to the FDIC's assessments on banks. This could raise enough funds to pay for the costs of the bill but it would also change who would pay the bills.

The biggest banks would still be payers but hedge funds would likely escape the tax, since they are not part of the FDIC system. On the other hand, smaller banks--exempted from the fee under the current bill--that operate under the FDIC system would likely find themselves footing the bill.

Really, both of these alternatives will still ultimately raise taxes. The first would utilize repaid TARP funds. But this money is supposed to go towards deficit reduction. So in reality, using this money would just provide Americans with $19 billion more in debt, which will ultimately raise their taxes.

The second option is a baffling "solution." So instead of taxing big banks and hedge funds a lot, Congress would prefer to tax all banks a little less? The potential harm would be approximately the same. If a tax on large financial firms is bad for the economy, then it's still bad if it's spread across all banks. Again, now it will just fall on the shoulders of all Americans when their bank passes the new fee onto them.

Neither of these solutions should satisfy centrist Republicans. If they somehow do, then it will be clear that these lawmakers don't really mind taxes -- just taxes on big banks and hedge funds. Presumably, a preference to tax either the people or their community banks more instead isn't the message they want to send to voters. The only way to impose this new regulation without new taxes is to cut spending.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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