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The Adam Smith Institute Blog

The tax-the-rich delusion

President Obama's bank tax would hit its customers, not the banks or the wealthy.

By Dr Madsen PirieGuest blogger / March 10, 2010

In his first State of the Union address in January, President Obama pushed the idea of a bank tax to repay the government for the bank bailout. A new study by the Congressional Budget Office concludes the impact on banks will be small and consumers, investors, and bank employees could end up paying for it.

Ryan Kelly/Congressional Quarterly/Newscom/File

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Those who like to propose novel taxes usually propose that they should be levied on rich people and corporations, and one of their standard assumptions is that rich people and corporations will actually pay them. In their hypothetical world the banker or businessman says, "Oh dear. There's a new tax. Darn it, I'm just going to have to be poorer." The same banker or businessman then hands over the cash to government and accepts the loss stoically.

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In the real world, of course, they work out ways of avoiding the tax if possible, or of making sure that someone else pays it if not. Other things being equal (which they are not always), the tax will be passed on in the form of a price increase for goods or services, and will often be ultimately paid by ordinary members of the public.

The latest one predicted to bring this about is President Obama's $90bn bank levy designed to recover money spent on the Troubled Assets Relief Programme. The White House proposal is for a 0.15 percent fee on the liabilities of banks with more than $50bn in assets, but the Congressional Budget Office now reports that the impact on banks will be small, and that the levy will end up being paid by the banks' customers and investors rather than by the banks themselves.

The CBO went on to say that customers could face higher rates for borrowing and increased charges, while investors could face lower share prices. It added that employees may receive less compensation as banks attempt to pass on the fee.

This is no surprise. The surprise is that earnest legislators still come forward with novel ways of taxing the rich, without taking any regard of the likelihood of who will actually end up paying their new taxes. Businesses in particular are assumed to have pockets so deep that they won't mind fishing some money out of them to fund the legislator's worthy causes, whereas the reality is that their customers will probably be the ones ultimately out of pocket.

No prizes are offered for working out who would end up paying for a Tobin tax.

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