TARP Tax Trickery: Banks Won't Really Pay Back All $90 billion

Remember that story last week about the new tax proposed by President Obama, which will be designed to recoup $90 billion in lost TARP money from the nation's largest financial firms? Well, there's a catch: The banks won't actually be repaying $90 billion. They'll only have to pay $58.5 billion, because the "Financial Crisis Responsibility Fee" will be tax deductible.Henry Blodget, who writes the Clusterstock blog for Business Insider, made that little tidbit public today. And his source for the claim that the fee will be tax deductible? The Treasury Department, which he says emphasized it during a conference call with Wall Street. I guess Treasury is trying to mute financial industry opposition to the new fee by saying "Hey, it won't be as bad as it sounds."

Taking this backdoor route to dealing with the banks' payback of TARP losses allows the administration to put out some nice sound bites to the public, and then whisper in bankers' ears that the government will ease the burden of the fee by allowing them to deduct it as a business expense. Start with $90 billion, but subtract a tax deduction of 35% ($31.5 billion), and the banks end up repaying only $58.5 billion of the money taxpayers lost bailing them out.

The basis for this tax-deductible status is that the FDIC fee banks pay for insurance is tax deductible. But should that precedent be extended to a fee intended specifically to repay taxpayers for the losses banks caused by their risky behaviors? Or should the taxpayers be paid back in full?

As DailyFinance columnist Peter Cohan wrote, "The banks, of course, say 'no fair.' But I disagree. Despite wriggling in front of Congress yesterday, Wall Street is the primary culprit for the financial crisis and should pick up these losses -- especially AIG's (AIG). That's because many Wall Street banks got a back door bailout through AIG when the government made good on the credit default swap payments AIG owed the banks but couldn't pay on."

If you, too, believe the banks should pay the full cost of TARP, write your congressmen. Let them know that when they turn the administration's concept into legislation, they need to be clear: The bill should state the Financial Crisis Responsibility Fee won't be tax deductible.
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