Getting Wall Street to pay up

govt_vs_wallstreet.gi.top.jpgBy Jeanne Sahadi, senior writer


NEW YORK (CNNMoney.com) -- The easy money has been taken off the table to pay for health reform. But Congress and the White House still have a lot they want to accomplish.

With tax receipts near their lowest level in 60 years, lawmakers are looking for new sources of revenue -- and Wall Street tops the hit list.

Among the upcoming efforts that there will be pressure to pay for: Extending expired tax breaks that typically are renewed every year. Efforts targeted at creating jobs. And a long-term extension of unemployment and health benefits for those out of work.

"The government is desperate for cash, and banks -- which are suddenly becoming profitable -- are attractive targets," said Jaret Seiberg, an analyst with Concept Capital's Washington Research Group, in a research note.

Two measures in particular have gotten a lot of attention recently: a bailout tax and an increase in the tax bite on hedge-fund managers.

The bailout tax, officially called a "financial crisis responsibility fee," would raise an estimated $90 billion over 10 years, and was included in President Obama's 2011 budget proposal. It would be paid largely by major financial institutions that contributed to the financial crisis, and were the biggest beneficiaries of extraordinary government actions.

The bailout tax would be based on a financial institution's size and liabilities, and firms could be subject to it even if they never received money from the Troubled Asset Relief Program (TARP) or if they did but repaid it.

The tax would be in place for a minimum of 10 years, or longer if need be, to ensure that taxpayers in the president's words "recover every single dime" of the federal bailout.

While no one argues with that sentiment, some lawmakers question why financial institutions should pay back the losses incurred by the automakers and AIG.

Moreover, some say if a bailout tax is imposed, it should be used to reduce the deficit. If the bailout tax revenue is instead used to pay for other spending, taxpayers would still be on the hook for paying back the money Uncle Sam borrowed to fund TARP.

Hitting up hedge funds

The tax on hedge-fund managers would come from upping the take on what's called carried interest, the portion of a fund's profits paid to managers. Currently, those managers are taxed at the low capital gains rate. Some argue they should be paying the income tax rate, which will be twice as high.

The proposal, estimated to raise $25 billion over 10 years, is not new. But lawmakers are looking at it again to help pay for the tax extender legislation.

That's because the two biggest measures expected to offset the cost of those extenders were instead used to pay for health reform: a $25 billion measure that will close a tax loophole for paper companies; and a $5.4 billion provision that makes it harder for companies to engage in tax dodges.

"With more than half the revenue raisers gone from [lawmakers'] tax extenders' bill, carried interest is looking more and more like the only thing that can plug the gap," said Anne Mathias, director of research at Concept Capital's Washington Research Group, in a research note.

If not now, later

Mathias adds, however, that a deal to tax carried interest as income is not yet done, and the final provision is likely to be narrowed and watered down.

Likewise, it's not clear whether there will be sufficient political support for the president's bailout tax as proposed.

But that doesn't mean financial institutions will be off the hook.

Rep. Sander Levin (D-MI), chairman of the House Ways & Means Committee, said Monday that lawmakers will consider some sort of tax on financial institutions. "There are various ways to go," he noted at a National Press Club luncheon.

The Joint Committee on Taxation recently put out a report laying out some of the alternatives. Among them, lawmakers could opt to impose an "excess" profits tax on financial institutions that have profits exceeding a given level. Or they could boost the income tax on such firms.

Separately, the International Monetary Fund is expected to propose two financial sector taxes later this week at a G20 meeting to pay for future bailouts and deter excessive risk taking, according to Tax Analysts.

As with any tax, though, there can be a number of unintended consequences: increased tax avoidance by an institution, the risk that a company would pass the tax burden along to its clients, a lower return for its investors or a reduction of a company's ability to compete globally.

Lawmakers will weigh such potentially negative effects. But over time, Seiberg expects support will build for higher taxes on financial institutions.

"Congress is out of low-hanging fruit to fund spending programs, and deficit reduction will become the new political mantra. Of all industries, the financial sector is in the weakest position to defend itself." To top of page

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