Thought of the Day
January 19, 2010
Besides being somewhat disingenuous, the decision by the President to levy a $90 billion, ten year, “tax” on banks receiving bail-out funds (a 0.15% tax on liabilities), illustrates the problem of government distorting incentives. The original purpose of the TARP program was to prevent a collapse of the financial system – a real possibility that seemed imminent in September-October 2008. We were all at risk because of the excessive use of leverage by banks; lax regulation; rating agencies being paid by issuers, not investors; politicians in bed with GSEs and investment banks, and consumers who believed the good times would continue to roll. Encompassing us all was a fog of hubris.
The disingenuous part of the President’s remarks is that he failed to mention that, with a couple of notable exceptions, the biggest banks have repaid the lent TARP funds with interest. Larger banks which have not completely paid back TARP funds include Citigroup, PNC Financial Services Group and SunTrust Banks. Of the $247 billion in TARP funds received by banks, $162 billion has been re-paid, plus $11 billion in interest. AIG has received about $70 billion and has re-paid nothing. The two auto companies received $66 billion and have re-paid nothing. While AIG is subject to the tax, the auto companies are not. Why not?
In taxing liabilities, the government is simply looking to the size of organizations and their subsequent success, a system which would reward failure and penalize success. Is this the proper role of government in a globally competitive world? When the auto companies were saved, so were UAW workers. Having helped put the auto companies into bankruptcy, should union workers be exempted from this tax?
The consequences posed by this action are serious and run to the heart of our capitalist, democratic society. Is it the role of government to prop up unprofitable businesses, especially ones like the auto industry, which are no longer vital to our national interests? We know that cars can be produced in this Country profitably, as Toyota, Nissan, BMW and Mercedes can attest. If a domestic auto industry wants to compete in a global economy, it is going to have to bring down costs (including legacy costs of long ago, too-generous, labor contracts) and produce cars people want to buy, not necessarily environmentally friendly ones. Do people really think that some government bureaucrat can do what private enterprise could not?
Deficits, no matter how incurred, must be repaid. Growing our way out is the best way, but higher taxes are bound to be part of the answer. There is an irony in that Americans are the most generous people on earth. When tragedy strikes they are the first to respond, as we can see in the disaster that struck Haiti last week. So a natural question: when tragedy struck our economy, as it did during the credit crisis and the ensuing recession, why didn’t people increase, voluntarily, the amount they pay the IRS? Certainly, extra payments would be welcome, accepted and tax-deductible. Warren Buffett has commented that his tax rate is less than that of his secretary. He has the ability to personally address that inequity. Like most of these people, he generously contributes to various charities. Why doesn’t he make up the difference and then some? Many of these same people call for higher rates. They say it is only fair. Their money is welcome, if they will only voluntarily write a check. Can it be that these same people question the efficiency of dollars spent on taxes once it falls into the hands of the tax collector?
I don’t pretend to have an answer, but I feel strongly that what has always driven Americans toward success has been the freedom to try, to succeed or fail, to be creative, to innovate and to excel. We want a tax code that encourages investment and innovation, not one that discourages hard work and creativity. A fascinating statistic of 2008, a year that started ominously and got worse, is that U.S. exports of goods and services increased by 12% that year to $1.84 trillion, or 13.1% of GDP. In contrast, exports in 2003 represented 9.5% of GDP and only 5.3% in 1968. Who, four years ago, would have predicted such an event given the crisis we have lived through?
A government that rewards failure, stifles innovation and penalizes success, is not one that can lead us to new levels of prosperity. I have been critical of many of the large banks, particularly the outrageous bonus payments of public companies. I deplore the drift over the past few decades that has greatly widened the gap between CEOs and average workers. But the answer, in my opinion, is not more government; it is in an education system that is aimed at improving the lot of all students, not one that keeps ineffective teachers employed because of tenure and keeps poorer children in under-performing schools; it is in an immigration system aimed at keeping the best foreign students in our Country after graduation, not one that sends them home for lack of a green card; it is a system that recognizes that people want to succeed, not one that encourages dependency.
The $90 billion tax, over ten years, is not going to break any of the banks, certainly not the well run ones, but it is the concept of penalizing success and the rewarding of failure that I find alarming. Success should be applauded. Bad luck happens and deserves our attention and support. Failure should be shunned. It is unnecessary and uncivil to demonize organizations that have proved successful and which are vital to our lives.
I will be off skiing the next three days, returning on Monday, January 25.