Financial Responsibility Tax

President Obama delivered a presentation yesterday detailing what he calls the “financial responsibility tax” that intends to recoup tax-payers money for the TARP bailout.  This article makes clear how it will work.  It is great that deposits will not be subject to the tax, but other liabilities on the balance sheet will be targeted.  This means debt financing of these large banks will be taxed.  While attempting to recover TARP funds (lost primarily by GM and AIG), the administration is also trying to deter banks from borrowing.  Meanwhile, all-time low-interest rates set by the fed do the opposite. 

Questions remain: 1) Will the banks ultimately pass through this cost to its customers, a.k.a., tax-paying corporations and individuals.  The administration asked the CEO’s of the banks not to do this….. but they will in order to grow margins and profits.  There’s no way to stop it.  In effect, the tax payers will be paying back themselves, which means they’re not actually getting recompensed. 2) What will be done with the fees received by the government and will we (tax payers) actually get our money back (or at least go towards reducing the federal debt)?  Or will our money be funneled to government spending projects?  3) Will this new tax cause even tighter lending at the exact wrong time, sending the economy into a double dip? 

Here are a few more interesting articles relating to the matter: Clusterstock post; Baseline Scenario post.  Both are worth the read.

-Billy Ray

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