Print | Share | Reprint

Obama deficit plan includes tax hikes on financial sector

by Ira Teinowitz In Washington | Published September 21, 2011 at 11:10 AM

President Obama is reviving plans for a Troubled Asset Relief Program tax on big financial institutions as part of a wide range of measures aimed at cutting the federal deficit by $3 trillion over 10 years.

As expected, the president's plan also included a provision that would tax carried interest earned by private equity and hedge fund managers as regular income rather than at the lower capital gains rates. This would reduce the deficit by $13 billion over 10 years.

In a speech Monday, Obama also called for an end to pay-for-delay drug patent settlements and urged fee increases by Fannie Mae and Freddie Mac as part of his proposal.

The president used his speech and an accompanying report by the Office of Management and Budget to lay out details of cuts and revenue increases he wants. His recommendations were submitted to a House-Senate "super committee" charged with finding ways to trim the federal deficit.

Obama renewed his push for a "financial crisis responsibility fee" that would be imposed upon financial firms with more than $50 billion in assets to "fully compensate taxpayers for the extraordinary support they provided to the financial sector through the Troubled Asset Relief Program." He first proposed the idea in January 2010 and pushed for it again in his 2012 federal fiscal-year budget proposal. Neither time did he garner congressional support.

Intended to generate $30 billion over 10 years, the president described the fee as an offset to some of the benefits that financial firms enjoyed from TARP.

"The assistance given to the largest financial firms represented an extraordinary step that no one wanted to take, but one that was necessary in order to stem a deeper financial crisis and set the economy on a path to recovery," the president said in the detailed recommendation. "The cost associated with the excessive risk-taking by the financial institutions continues to ripple through the economy."

The president acknowledged that most banks have already repaid their TARP loans, but said they needed to pay more.

"Although many of the largest financial firms have repaid the Treasury for their TARP assistance, they continue to implicitly benefit from the TARP fund that bolstered their balance sheets during a period of great economic upheaval," he said. "Shared responsibility requires the largest financial institutions pay back the taxpayer for the extraordinary support they received."

He proposed that the fee continue until all TARP costs are repaid.

Scott Talbot, senior vice president of government affairs for the Financial Services Roundtable, said because banks have repaid all of Treasury's TARP costs with interest, the fee effectively pins them with the cost of TARP investments in American International Group Inc. and auto companies that haven't been repaid.

"It is taxing banks to pay for the auto industry and AIG," he said. "The taxpayer dollars [for banks] have been repaid with interest."

Talbot also called the request for payment "premature," noting that TARP was supposed to be a five-year program whose cost won't be known.

American Bankers Association's executive vice president, Wayne A. Abernathy, suggested the proposal was unfair, unwise and punitive.

Abernathy said it was unfair because the return from banks for TARP loans amounted to a double-digit gain for the Treasury of its investment. He said it was unwise because any money raised would come out of funds that would otherwise be used to provide loans. "A new tax like this would cripple banks ability to put savings to work," Abernathy said. He said the proposal is potentially punitive because it could be viewed as an illegal bill of attainder punishment of banks without trial.

The president also proposed upping fees Fannie Mae and Freddie Mac charge mortgage lenders by 10 basis points, which amounts to one-tenth of 1%. The relatively small increase would reduce government costs for the program by $28 billion over 10 years.

The ban on pay-for-delay settlements of generic-drugs patents is intended to lower government healthcare costs and lower prescription drug costs. The Obama proposal said agreements between generic drugmakers and branded drugmakers to delay marketing generics costs consumers $3.5 billion per year and also impact what the federal government pays for healthcare.

Share:

Tags: President Obama | TARP | tax

Regulatory

Obama deficit plan includes tax hikes on financial sector

Free preview

Meet the journalists

Ira Teinowitz

Senior reporter, Washington bureau

Movers & Shakers

Video

The Deal interview: Adam Max

Sectors