Proposed Financial Firm Tax

Brian J. King

On January 17, 2015, President Obama, in a White House press release, proposed a “7 basis point fee,” or tax on the liabilities of financial institutions with assets over $50 billion (“Liability Tax”).  This tax is expected to raise $110 billion over the next ten years to fund the President’s proposed middle-class tax breaks.  It is one of many changes proposed to support “a $500 credit for families in which both spouses work; increased child care and education credits; and incentives to save for retirement.”  Another leading proposal is being championed by Dave Camp (R, Mich.), former Chairman of the House Ways and Means Committee.  Camp proposed a similar tax—the Tax Reform Act of 2014 (“Camp’s Proposal”), in February 2014.  At the time, Camp’s proposal was considered “the most significant revision to the [Internal Revenue Code] since the Tax Reform Act of 1986” if enacted.  There are problems with both President Obama’s proposal and Camp’s Proposal.

The Liability Tax hike is not the first time President Obama has proposed a new tax on financial institutions.  In January 2010, the President proposed the “Financial Crisis Responsibility Fee,” which ultimately did not come to fruition.  The 2010 proposal is very similar to his 2015 proposal in that the tax would have targeted financial institutions yielding enormous profits and offering large executive compensation packages.  President Obama’s proposed Liability Tax would not tax bank assets directly, but rather would levy a tax on their liabilities, or the amount of debt they owe, known as “leverage” in the financial services industry.

Like President Obama’s Liability Tax, Camp’s Proposal contained a tax on “systematically important financial institution[s] . . . subject to section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” i.e, financial institutions with assets over $50 billion.  Section 7004 of Camp’s proposal contained a 0.035 percent excise tax on the excess total consolidated assets of these important financial institutions, which was expected to raise $86.4 billion over ten years. Camp immediately met staunch opposition from members of his own party who claimed, like many financial institutions claimed, that the tax would reduce access to credit, stifle economic growth, and worsen the unemployment problem.  Furthermore, Camp may face constitutional problems with assessing a direct tax on a bank’s assets.

The White House Press Fact Sheet indicates that President Obama’s Liability Tax proposal is “consistent” with Camp’s Proposal.  Yet, though the structure of the two tax proposals may be similar, the purposes behind each are not truly “consistent.”  According to the White House Fact Sheet, the purpose of President Obama’s Liability Tax on these large financial firms is to “lead[] them to make decisions more consistent with the economy-wide effects of their actions, which would in turn help reduce the probability of major defaults that can have widespread economic costs.” In this manner, President Obama’s proposal acts more as a proverbial carrot, intended to lead financial institutions toward the desired practice of decreasing leverage, and therefore, risk. On the other hand, Camp’s office stated that “the new tax ‘would address the significant implicit subsidy bestowed on big Wall Street banks and other financial institutions’ due to the perception they are ‘too big to fail’ and would be backed by the government in a crisis.”  In this sense Camp’s Proposal, while accomplishing the same practical effect, seems to position the government as an insurance provider, collecting premiums until the time these financial institutions fail again and require further bailouts.

The Obama-proposed new tax on leverage is problematic because it cuts to the core of how banks make money—that is, by borrowing money and using it to make more money.  Some scholars have conducted studies on what could happen to the economy if a tax like the Liability Tax was imposed on banks.  These scholars have suggested that large banks are not as responsive to taxation as smaller banks.  Further, while the financial crisis of late 2008 was caused in large part by banks taking on too much debt, and a tax on this debt would serve a deterrent effect, the financial crisis was also largely caused by the quality of debt the banks undertook—namely subprime mortgages—and not just the volume of debt.

Regardless of motive, President Obama is likely to face opposition to his proposal from financial firms and politicians.  The President’s Liability Tax will affect many firms incorporated in Delaware including JPMorgan Chase & Co., Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, and General Electric.  These corporations could pay “at least hundreds of millions” of dollars in taxes.  Some of these firms have already lobbied against Camp’s proposal out of fear of the repercussions of the tax. In fact, fifty-four Republicans signed a letter to Camp expressing their concerns regarding the potential negative of effect on the economy because of Camp’s proposal.

Any proposed tax on financial institutions will likely be met with this type of resistance, as well as the perpetual argument that new taxes will have a chilling effect on economic growth. Critics immediately began voicing their outrage and concern over the President’s 2015 proposal, which was released three days before the annual State of the Union Address, but which was not discussed during the Address.  According to the Securities Industry and Financial Markets Association (“SIFMA”), President Obama’s Liability Tax could have an adverse effect on the market because “banks [will be] less likely to lend,” as it will raise the cost of capital.  The lobbying group also claimed that this tax is “duplicative” of the Dodd-Frank Act, which is currently facing attacks by Republican lawmakers.  However, some critics have said that the Liability Tax will lead to banks “shrink[ing]” their liabilities and will encourage them to seek other avenues to raise money such as selling shares.

            Considering all of the competing opinions on taxing banks’ leverage, and the studies conducted on this issue, the question comes to mind: Is President Obama’s plan simply a Pigovian tax, spawn from a sincere concern for the economy, or is it a romantic Robin Hood plan to raise revenue?  It will be interesting to see how President Obama’s proposal plays out in 2015. Much like the scrutiny Camp faced from his fellow Republicans, President Obama’s Liability Tax certainty will not see overwhelming support in the Republican-controlled House.  Although President Obama was successful in encouraging the Dodd-Frank Act, it appears that his latest proposal will see the same fruitless fate as his 2010 Financial Crisis Responsibility Fee proposal, as it should.

Brian J. King is a recent graduate of Widener and a former staff editor on Volume 40 of the Delaware Journal of Corporate Law. He was also the President of the Intellectual Property Society. Brian works full time as a Business Development Manager at CSC Digital Brand Services.

Suggested Citation: Brian J. King, Proposed Financial Firm TaxDel. J. Corp. L. (June 6, 2015), www.djcl.org/blog.

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