Two proposed taxes — one on securities transactions, and the other on major financial companies' liabilities — would harm pension funds, even though they don't directly apply to them. They also would generally harm the still-recovering financial markets and the economy.
The taxes are the latest of a number of proposed tax increases from Congress and the Obama administration as they seek to reduce the ballooning federal budget deficit while expanding health insurance coverage.
Meanwhile, income taxes already are slated to increase as Bush administration cuts expire.
The latest proposals, if passed, could slam the brakes on investment. Congress and the administration should be trying to encourage more investment, not raise obstacles to doing so.
Legislation introduced in Congress on Dec. 3 last year would tax stock, commodity futures, swaps and other financial transactions, although not those of pension funds.
The Obama administration unveiled its proposed Financial Crisis Responsibility Fee, which is like a tax, targeting major banks and financial firms on Jan. 14.
Pension funds, because they are exempt from the proposed taxes, might believe they have “no skin in the game,” and that they should stay out of any argument about them to avoid any political backlash. But they should not ignore the proposals because of the harm they could do to shareholder value, market liquidity and economic recovery.
Both of the proposed taxes target Wall Street, the designated scapegoat for the financial market meltdown.
These are punitive taxes. The companies indeed bear much of the blame, but so do many other organizations, such as Federal National Mortgage Association, Federal Home Loan Mortgage Corp. and the Federal Reserve Board, and Congress for promoting lax housing-financing policies.
The transaction tax, introduced by Rep. Peter DeFazio, D-Ore., would apply a 25-basis-point tax on stock transactions, and a 2-basis-point tax on commodity futures, options, swaps and credit default swaps. The bill exempts pension funds and other tax-exempt retirement accounts, mutual funds and transactions that total less than $100,000 a year.
But there is no doubt this transaction tax would, at least in part, be passed on to clients — taxable or tax-exempt. In addition, the bill would drive some large investors to move trading offshore to avoid the tax, reducing the liquidity of U.S. markets, and making foreign investors reluctant to trade in U.S. markets.
The Obama administration seeks to impose a fee of 15 basis points a year on the liabilities of the largest financial firms “until the American people are fully compensated for the extraordinary assistance they provided to Wall Street,” according to a White House statement Jan. 14. The fee, which would go into effect June 30, would last 10 years, or “even longer if needed to pay back every penny of” the Trouble Assets Relief Program.
This bank tax also would largely be passed on to customers, and to the extent it could not be, it would raise financial companies' cost and harm their competitive position and thus lower shareholder value.
Taking money out of the economy with the bank and transaction taxes would also weaken efforts by the financial companies to use their funds to revive the lending market and thus overall economic activity.
Pension funds are major owners of financial stocks, and the revenue the tax would raise belongs to the shareholders.
In addition, the proposal isn't evenhanded. It excludes General Motors Co. and Chrysler Group LLC, which haven't paid back TARP financing.
Some of the banks that will be hit by the tax have repaid their TARP financing. Other banks, and insurance companies that would have to pay the tax never took any TARP money and were at most peripherally involved in bringing about the crisis. The administration should seek repayment of federal financing in the proper way by billing the companies under the TARP provisions.
Officials at major pension funds should loudly resist these taxes. One way or another, they will eventually pay them. They, in turn, will have to pass the taxes on to those who contribute to the funds, in lower valuation or wages or higher local taxes.
With federal revenue fungible, it's doubtful the two taxes' proceeds would be used to reduce the deficit, but more likely they would be seen as lucrative sources of money for further spending by Congress.