Fisher Investments Editorial Staff
Taxes

Taxing TARP

By, 01/15/2010

Story Highlights:

  • On Thursday, President Obama announced proposals to help the US recoup $117 billion in projected TARP losses.
  • The tax will be levied mostly on big banks, who have actually mostly paid back TARP loans plus interest.
  • The tax, if it passes, is likely nothing more than a harmless, albeit silly, swipe at a politically convenient target. 

__________________________________________________________________________

On Thursday, President Obama announced a proposal to help the US recoup $117 billion in projected losses from TARP funds—lent to Financials firms and two US automakers. The tax, called the "Financial Crisis Responsibility Fee," will be levied only on Financials firms—mostly US with some US subsidiaries of foreign firms. America's 10 largest firms will likely pay 60% of the total amount.

Let's see if we understand this:

The big-bank TARP recipients have now paid back most all their TARP funds plus interest. The autos have not. TARP, as initially approved by Congress, was meant only to go to Financials to buy "troubled assets" (hence TARP). Not autos.

The banks, who've paid back their loans, will be taxed to help the government recoup losses it made by lending to an industry that was never intended to receive said funds and has been long-term unprofitable. (Incidentally, aren't the big bank CEOs currently in Washington explicitly to be grilled by politicians for having made risky loans?)

GM and Chrysler are exempt from this tax. The White House says this is because the automakers collapsed because of the banks. (Please see previous comment about autos being long-term unprofitable.)

The tax will be based on a percent of banks' liabilities. The government says it's confident this won't seem like arbitrary "punishment." Rather, it's meant to deter further "risky behavior." Presumably, this means things like being profitable enough to pay back government loans.

The government wants the banks to lend more. Banks like lending. Lending is profitable for banks. The government wants to deter "risky" behavior by increasing taxes. On profits. Which the banks get from lending. Which create profits. Which are then taxed. To deter banks from making too much profit. From lending. Which the government wants the banks to do more of. Our brains hurt.

President Obama has suggested the taxes be paid out of monies intended for bonuses, which he called "obscene" and "offensive." Bonuses—obscene and PG-rated ones alike—paid to employees are taxed as personal income. Bonuses not paid out remain on the firms' income statements and are taxed at their corporate rate. Which is, all but certainly, much lower than the personal income rate of the bonus recipient.

The government likely collects more money from big bonuses. Which could be used to offset losses from risky loans made to long-term unprofitable industries. By the government.

Higher tax treatment on bank bonuses isn't likely to have the impact politicians hope. (See "UK, Goldman considering leaving of".)

Yes, we're pretty sure we have that straight. We've said Financials likely continue facing some headwinds, like ongoing controls, a pending regulatory overhaul, and a glut of new stock supply from firms trying to recapitalize during the credit crisis. This doesn't mean they can't or won't be profitable, or earnings won't look robust, particularly when compared to depressed earnings a year ago. And we're not even certain the current proposals will pass. But it's perfectly logical being the White House's go-to piñata is an additional headwind, and the banks might find themselves still more profitable, and be more eager to lend, if they didn't wake up each day wondering, "What fresh insanity has the government cooked up for us today?"

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:



*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Subscribe

Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.