This past Thursday, the Obama Administration proposed a “financial-crisis-responsibility fee” on select financial institutions which received TARP funds. According to the Administration, the tax would be 15 basis points (.15%), levied upon liabilities (assets minus Tier 1 capital and uninsured deposits) of financial institutions with $50 billion in assets, and is projected to collect $117 billion over a 10-year period. The Obama Administration claims that the top 10 financial institutions will pay 60% of the expected revenues.

The purpose of the tax is ostensibly for direct beneficiaries of TARP – the 2008 “bailout” legislation – to repay the government. “We want out money back, and we’re going to get it,” claims President Obama. The rationale of TARP and “too-big-to-fail” policy in general, however, was that the failure of financial institutions was a “systemic risk” to the economy, and that preventing failure would indirectly benefit the public. Depicting financial institutions as the sole beneficiaries of TARP misrepresents the entire purpose of the legislation.

TARP funds, furthermore, were not distributed solely according to financial need; in order to protect runs on failing financial institutions, all were required to accept some TARP funds regardless of need.  Many of the financial institutions this tax targets have already repaid the government for TARP. For example, of the 10 major financial institutions which received TARP funds – some of which neither needed nor wanted it – only 1 has not fully repaid the government.

In fact, the government’s biggest losses are from the bailout of Fannie Mae, Freddie Mac, General Motors, and Chrysler, yet these government-sponsored enterprises and union-backed automakers are exempted from the new tax. Perhaps the Obama Administration’s ulterior motive is to tax financial institutions in order to recoup its losses from bailing out its favored failures; Fannie and Freddie can continue to underwrite risky mortgages, and Detroit unions can continue to fund the Democratic Party. Or maybe the tax is simply an election-year stunt to pander to public resentment of “Wall Street,” sacrificing innocent financial institutions on the altar of reelection. With such a disingenuous rationale and unfair administration, this tax cannot be considered serious policymaking, but rather a shameless political ploy.

Levying a tax upon a financial institution’s liabilities has the potential for negative economic effects, particularly decreased lending operations and a globally disadvantaged American financial industry. Given that the tax is levied upon liabilities (rather than a more liquid base), financial institutions will pay the tax from net income, though cash-flow problems may force them to pay from retained earnings. Since lending is a “fractional reserve” process (meaning bank reserves are only a fraction of their total loans), any such decrease in the equity of financial institutions will exponentially decrease lending. Of course, financial institutions – like all taxed corporations – will cancel out the tax by passing its costs along to the consumer as much as possible. If the tax becomes too burdensome, however, financial institutions can relocate to more competitive financial centers like London or Tokyo, thus depriving the American economy of valuable financial services, and the government of corporate and income tax revenue. Although Obama wishes to gratify liberal rage at financial institutions, this tax will do the economy more harm than good.

The Obama Administration’s financial-crisis-responsibility fee is based on false pretenses, an egregious display of political favoritism, and will negatively affect the economy. The American people should reject Obama’s populism and demagoguery for rational economic policymaking.