Washington Hotline


Tax Quote of the Week

“Government expands to absorb revenue and then some.”

– Tom Wicker

Should Banks Pay a TARP Tax?

During the financial crisis in October of 2008, Congress passed the Emergency Economic Stabilization Act. Part of that Act created the Troubled Asset Relief Program (TARP) with a $700 billion fund for loans to banks.

As part of TARP, the banks borrowed $248 billion. Approximately $199 billion of that amount has been repaid.

However, TARP was also extended to auto companies and auto-financing entities. In addition, because of the fear of collapse of the entire system if securities insurance funds went under, the government funded a loan/guarantee of over $100 billion to financial giant AIG. The total distribution to General Motors, AIG, CIT and related entities was $244 billion. Most of this amount is still unpaid.

Part of the Emergency Economic Stabilization Act was a requirement that Treasury eventually determined the best means for the government to be repaid the TARP funds. As a result, Treasury Secretary Timothy Geithner has proposed a 0.15% tax on the covered liabilities of banks with over $50 billion in assets.

Sec. Geithner appeared on May 4, 2010 before the Senate Finance Committee to explain the administration proposal. He noted that it is appropriate for the banks to pay for TARP. The TARP Program put out “a financial fire” and the banks benefited from it. Sec. Geithner stated that the purpose of “the Financial Crisis Responsibility Fee proposed by President Obama in January is to make sure that the direct costs of TARP are paid for by the major financial institutions, not by the taxpayer.”

In response to concerns by senators that a TARP tax may cause lending to small businesses to be reduced, Sec. Geithner responded, “Small businesses would not be harmed by the tax for the simple reason that it leaves untouched 99% of American financial institutions.”

The tax on large banks is estimated to raise approximately $90 billion over 10 years. The cost of TARP is currently estimated by the Congressional Budget Office to be approximately $110 billion.

Sen. Max Baucus (D-MT) indicated that a TARP tax is “inevitable.” He stated, “We need to understand the best way to design the tax so that it’s fair and achieves its purpose. We need to understand who should pay the tax. And we need to understand what effect the tax would have on small businesses and the economy.”

Predictably, the American Bankers Association opposed the tax. Their representative James Chessen responded, “Had the TARP been limited to the banking industry, there would be no losses on that program.” The ABA maintained that it was not fair to tax the banks because government losses on TARP will be primarily related to the auto companies and other non-bank recipients of TARP loans.

Tax Foundation Highlights 2010 Charitable Gift Benefits

The Tax Foundation, a non-partisan, nonprofit organization that monitors federal fiscal policy, published a news release that suggested high-income taxpayers should make major charitable gifts in 2010.

According to the Tax Foundation, 2010 is an excellent year for large gifts because the PEP and Pease provisions are not applicable for this year. However, they are likely to be restored in 2011.

The PEP limit refers to the personal exemption phase-out for higher-income individuals. The Pease provision is named after former Congressman Donald Pease (D-OH). It creates a 3% floor on itemized deductions for high-income taxpayers. A high-income taxpayer could lose up to 80% of his or her itemized deductions due to that floor.

Neither the PEP nor the Pease limits apply to 2010. Therefore, it is a very good year to make large charitable gifts because the deductions will qualify in full.

However, under the proposed budgets by President Obama, the Pease itemized floor will apply in 2011 for married couples with income over $254,550 and single persons with incomes over $203,650.

The effect in 2011 is that the proposed 36% tax bracket (increased from 33% in 2010) will actually be raised effectively to 39.2% due to the PEP and Pease limits. In addition, the 39.6% proposed bracket in 2011 (raised from the 2010 35% bracket) will effectively be approximately 43% due to the PEP and Pease limits.

Because the PEP and Pease limits do not apply in 2010, the Tax Foundation recommends large charitable gifts be made this year.

Should Government Mandate 401(k) Annuities?

Recent hearings in the House and Senate have focused on the need for 401(k) and IRA accounts to provide better retirement income. Vice President Joe Biden referred to these discussions in the White House Task Force on the Middle Class. He suggested creating “guaranteed retirement accounts (GRAs).”

The guaranteed retirement accounts may replace conventional 401(k)s and could eventually provide annuity income to individuals.

In response to a White House request, the General Accounting Office (GAO) released a report on April 28, 2010 that discussed some of these retirement issues. The GAO noted that a couple age 62 has at least a 47% probability that one of the two spouses will live to age 90. While life expectancy is in the mid-to-late 70s when one is born, the age at maturity increases as we grow older. Therefore, the average retirement age couple in America has a reasonable prospect that the survivor will live to be age 90.

GAO reports that Social Security is the primary support for lower income retired Americans. For the median retired person, Social Security is expected to provide approximately 47% of retirement income. The balance will come from savings or investments, a qualified plan such as a 401(k) or IRA and retirement earnings from employment.

The GAO report notes that an annuity may provide more income than a conservative investment, such as a bond or CD.

Republican lawmakers this week wrote a letter to Treasury Secretary Timothy Geithner and expressed concern about the guaranteed retirement accounts. They noted that a number of the witnesses before the various committees would “dismantle the present private-sector 401(k) system” and replace it with the GRA.

Their letter expressed concern and opposition to any effort to “nationalize” the 401(k) system. The Republican lawmakers continued by noting that over 90% of households have a favorable opinion of 401(k) or IRA accounts.

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