14
Jan
10

Tidbits on taxation

A few things here, all vaguely on the theme of “if you want less of something, tax it”.

——

First, Felix Salmon discusses the proposed “bank tax”.  I find myself in partial agreement but with significant reservations; this is pretty much what happens every time I read Felix Salmon’s column.

Here’s how it’s described:

[E]ssentially, it’s a 0.15% tax on bank liabilities excluding deposits (which already come with an FDIC fee attached). It would be paid by roughly 50 firms, including GE Capital, and would raise something on the order of $90 billion over 10 years. That’s an average of $180 million per firm per year, which seems eminently affordable to me.US subsidiaries of foreign banks like HSBC and Deutsche Bank will be taxed; it’s unclear whether foreign subsidiaries of US banks will be as well. The aim of the tax is to ensure that the entire TARP fund gets repaid in full — not just the money lent to the banks directly, but also the money lent to the banks indirectly, through the AIG bailout. The tax is not, however, designed to repay the cost of rescuing Fannie and Freddie.

I like the way the tax is structured: it’s simple, and the liabilities-minus-deposits formula naturally puts more of the onus on investment banks than commercial banks.

Well, so far so good.  Felix doesn’t address Coyote’s objection that, if the tax is meant to repay TARP, it should be levied only against banks that participated in TARP*, but other than that it seems pretty moderate as taxes go.  The implementation, so far at least, looks pretty simple and not obviously easy to game.  And if the legislation is actually written to self-destruct — er, “sunset” — when TARP has been repaid, I could actually get behind the concept as sound fiscal planning rather than yet another cash grab.  (That’s a big “if”, but stranger things have happened.)

Now, on to the effects.  If you buy the idea that the TARP bailout recipients will be hardest-hit by this tax, and that it will in fact go away once TARP has been paid off, it might actually mitigate the moral hazard inherent in “too big to fail” and the associated blank-cheque expectation of government backing.  For banks, at least; clearly, it’s sending the opposite message to companies that think of themselves more like General Motors (“Fuck up, and we’ll make the banks bail you out!”).  Felix suggests:

It also encourages banks to fund themselves with equity rather than debt.

I’m not entirely convinced that debt financing was itself the problem; it seems to me that relaxed (to say the least) underwriting and securitization standards, combined with incentives that concentrated debt in the residential housing market, were more to blame for the credit crisis than simply skewed debt-to-equity ratios.  Then again, I know barely more than fuck-all about finance, so don’t bet your house on my opinion.

Then we get this:

Will the fee be passed on to bank customers? Well, it doesn’t apply to deposits, so retail banking customers shouldn’t be affected, but you never know. If they are, at the margin that might be no bad thing, if it encourages bank customers to move their money to small-enough-to-fail banks and credit unions.

Um.  Money is fungible.  Let’s restate the question: what’s stopping banks from raising fees to recoup the tax?  If the answer is “at the margin, some customers will switch to smaller banks”, I submit that most customers won’t, and most large banks will cheerfully hike their rates and surcharges even further.

So it could turn out to be a welcome nod in the direction of actually paying our bills and mitigating too-big-to-fail moral hazard, but I’m not gonna hold my breath.

——

Next we look at the proposed tax on “Cadillac” health insurance.  Coyote explores the incentives that led to (and are now leading away from) gilt-edged employer-sponsored health benefits:

History teaches us that tax policy has a huge effect on behavior.  Witness the fact that so many people rely on their employer for health care.  As we see today, this is a really bad idea, but it was hatched because tax law provided incentives for paying compensation in the form of health insurance premiums, since these are not subject to either income or payroll taxes.

Already, employers are offering employees what are effectively buy-outs of health care — higher pay in return for reduced health care benefits.  For employers, the upside risk on health care costs now outweigh the tax advantages of health insurance as a compensation tool.  Given this trend, what do you think will happen when employees suddenly have the same incentive, to roll back health care coverage to get under whatever bar is set for an insurance package Congress thinks is too rich (hint:  wherever the bar is set, it will be below the health insurance Congress provides itself).  Employers and employees are now going to have a shared incentive to back off on health care benefits in exchange for more cash.

I’m given to understand that those insurance-premium tax incentives are one reason why individual health insurance is so expensive (sorta like business class airplane tickets: they’re targeted at people who’re paying with company funds).  If that incentive goes away for many-benefits coverage, will the price of high-end health insurance come down?  Or will the insurance companies just offer less and less of it?  Either way, planning on the “Cadillac tax” income seems like a remarkably bad idea.

Of course, we should be calling it the “Lexus” insurance plan tax, not the “Cadillac” tax — seems that labour unions have negotiated a two-year tax exemption on their plans, so the folks building Caddys won’t be penalized:

This is of course business as usual.  (It might be heartening to labour advocates that the larger unions wield — and are seen to wield — just as much lobbying clout as the large corporations whose power they’re said to offset.)  It may also be unusually bad timing:

This may backfire.  If you think that the Nebraska deal was unpopular, just wait until the administration announces higher taxes on everyone but its friends in the labor movement.  We may see if the popularity of the health care bill still has room to fall.

The more I think about this, the more I think it’s a huge mistake.  Support for unions is at a record low, and the GM deal has already made people think that the Democrats are doing sweetheart deals for Big Labor with our money.  Republicans will have a field day.

Next question: has the Republican brand disintegrated to the point where even stuff like this can’t help them?  I could be convinced either way.

——

* And a pair of car companies we all know and loathe

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