New Tax For Finance Firms Proposed By Obama

Pres. Barack Obama proposed a new tax on financial institutions during his State of the Union Address earlier in January.

The new tax policy, which would levy a seven-point basis fee on the total liabilities of roughly 100 financial firms with more than $50 billion in assets, would generate an estimated $110 billion in tax revenue over the course of 10 years, according to Bloomberg.

Broader approach

While the president suggested a similar tax in the past, the new policy would affect a broader array of financial institutions such as insurance companies and asset managers, a senior administration official told the news source. Because of this more expansive tax base, the new proposal would raise around twice as much money while at the same time imposing a lower rate on industry participants.

The financial institutions that would need to pay this new tax fall under the description of “too big too fail,” meaning that their vast size provides them with both lower borrowing costs and also insurance that they will receive bailout money if needed, since their dissolution could help trigger the financial system’s collapse, noted Forbes contributor Tim Worstall.

While their key role ensures these financial institutions receive protection from the federal government, these companies are not actively paying for their insurance, stated Worstall, who currently serves as a fellow at the Adam Smith Institute and has published in a wide range of venues.

Managing risk

While the average taxpayer might feel comfort that the largest U.S. banks are insulated from failing completely, they might not be so enthused if they need to foot the bill. This taxpayer might be happy to know that many predict the new policy could give major banks less incentive to take big risks, CNNMoney reported.

The White House has stated that the proposed tax would “make it more costly for the largest financial firms to finance their activities by borrowing heavily,” according to the news source. However, there are some fine points that need to be clarified. While the proposal stated it would affect liabilities, simply targeting all liabilities could prompt banks to originate fewer loans.

Moving forward

Obama has indicated that if he succeeded in obtaining the tax revenue from this proposal, he would use the money to expand tax benefits that would affect the middle class, including credits for child care and higher education, Bloomberg reported. These efforts dovetail with his recently announced plans to work with Congress to provide community college education free to millions of students.

“What you’re seeing here is really dedicated middle-class tax relief to really get at that problem of middle-class wage stagnation,” stated Harry Stein, who works with the Center for American Progress as the director of fiscal policy, according to the news source.