Consumers likely to pay for bank levy

The Obama administration has proposed a $90 billion to $100 billion levy over 10 years on large financial institutions, aimed at recovering the money that the government used to stave off financial disaster in late 2008 and early 2009. It will probably get the money, but not over 10 years and not just from banks.

The government expects to lose about $117 billion of the money used to bail out banks, American International Group Inc., Chrysler Corp. and General Motors Corp. — even though most of the major banks have paid off their loans with interest.

There are apparently three motives behind the levy: It would help reduce the budget deficit, it would punish banks for contributing to the near-disaster, and it would be a sop to populist anger over the huge bonuses that large banks are awarding their senior employees.

The first of the motives has some validity, though since many of the large banks have repaid the money that they received under the Troubled Asset Relief Program with interest, it may not seem fair to hit them up for more, while leaving untouched Chrysler and GM, which have yet to repay any of the assistance they received and are unlikely to repay all of it.

There is also some validity to punishing banks for irresponsible or careless behavior, but many others, including some politicians, could be punished for that as well. Sen. Chris Dodd, D. Conn, already has been.

But there is no validity to punishing banks largely to satisfy populist anger over bank bonuses.

Any levy should be aimed at three key issues: raising additional revenue, discouraging similar irresponsible behavior and encouraging Wall Street to adopt more-reasonable compensation practices. The proposed levy would raise additional revenue, and it could have a modest impact on risky behavior, but it wouldn’t affect compensation.

The administration apparently tried to be careful in designing the levy so as not to target the “greedy bankers,” as President Barack Obama has called them, and instead proposed to hit the bank shareholders, small businesses and regular customers.

On that count, the administration has almost certainly failed. Most likely, banks would find a way to pass this levy on to their customers.

The new levy would tax banks on the difference between their assets and their combined equity and insured deposits, which would be a rough measure of the risks that they were taking.

This could encourage banks to reduce their level of risk taking, but they no doubt would treat the levy as another cost of doing business, to be passed on.

Most academic studies have suggested that it is virtually impossible to prevent companies from passing on corporate taxes to their shareholders in lower dividends, their employees in lower wages and/or their customers in higher prices or reduced service.

In this case, the tax no doubt would be passed on to savers largely in the form of lower interest payments, to borrowers in higher fees and interest rates, and it could further discourage the banks from lending to smaller companies. At the latter, the investment returns often are lowest because the costs of serving them are generally higher than on loans to large corporations.

The banks already are under fire for not lending enough. A tax on liabilities wouldn’t encourage increased lending.

The administration and Congress will likely continue to wrestle with the details of the proposal, including how many institutions would have to pay, well into this year. But one thing is certain: Almost no one will be happy with the final form.