WASHINGTON -- House Ways and Means Committee Chairman Dave Camp (R-Mich.) is considering legislation that would significantly increase taxes for the nation's largest banks.
The draft legislation, which may get significant revision before it's presented to a congressional committee, would be vehemently opposed by Wall Street and other major corporations that trade heavily in derivative securities.
They may have only themselves to blame. Congressional Republicans have been furious at top corporate executives lobbying heavily for a "grand bargain" that would include tax hikes and cuts to Social Security, Medicare and Medicaid, according to congressional GOP insiders. Republican leaders were further piqued when business executives began lobbying for certain corporate tax reforms, leading to a sharply worded letter from Camp to the Business Roundtable, a lobbying group of corporate CEOs.
One Republican operative told HuffPost that Camp's bill is political payback for the CEOs collaborating with the Fix the Debt coalition, which worked with corporate chiefs who had pressured Republicans to accept tax increases as part of a deal to avert the so-called fiscal cliff at the close of 2012.
"This transaction tax was only a matter of time after Camp's letter to the Business Roundtable," the GOP operative said. "In just a few months, their lobbying campaign has resulted in Republicans initiating new revenues on their backs. Maybe the CEOs can kill it by Democrats insisting the taxes aren't high enough."
Camp and Sen. Orrin Hatch (R-Utah), the Senate Finance Committee ranking member, penned a letter to the Business Roundtable on Dec. 14, 2012, chastising executives for urging lawmakers to accept higher taxes as part of a fiscal cliff deal.
"The practical reality is that there simply is not enough money on the individual side of the tax code to achieve the size of tax increases the President is seeking," Camp and Hatch wrote. "In endorsing the President’s push for higher tax rates, you are also risking some of your own top priorities for tax reform."
Camp's new bill would harvest government revenues from complex financial transactions involving derivatives, some of which figured prominently in the 2008 banking collapse. Although the 2010 financial reform legislation would curb some excesses in the derivatives market, the legislation isn't yet fully implemented, and leaves much of the market unregulated. Financial reform advocates have urged new taxes on derivatives to deter excessive risk-taking by big banks.
The U.S. derivatives market exceeds $600 trillion, according to the Bank for International Settlements. That's nearly 10 times the size of the entire global economy. Derivatives, including credit default swaps, have also been a hotbed for abuse, serving as the flashpoint for insurance giant AIG's collapse and the source of the SEC's punishment of Goldman Sachs for betting against its own clients.
Camp's bill would establish a new tax regime for derivatives, requiring banks to declare the fair market value of the products at the end of each year. Any increase in value would be considered corporate income, subject to taxation. It's a more aggressive tax treatment than Wall Street enjoys for either derivatives or for trading in more traditional securities.
Under current law, banks only pay taxes on investments after selling them. That means banks can avoid paying taxes on stocks that rise in value by simply hanging onto them. But if investments lose value over the course of a year, banks can sell them at the end of December to record a loss for tax purposes. This loss can be deducted from the bank's overall tax bill, reducing the amount that goes to the government, even if banks plow money back into the same investment a few weeks later.
The bill would significantly strengthen the Volcker Rule, which bans banks from speculating in securities markets with taxpayer money. The Volcker Rule's implementation has been delayed as bank lobbyists have flooded regulatory agencies in Washington, pillorying the ban with loopholes. Hefty tax burdens for proprietary trading would reduce bank incentives to engage in the risky activity.
The unpopularity of the Fix the Debt CEOs is bipartisan in Washington. At one meeting during the fiscal cliff debate between a corporate CEOs and the four top Democrats in the Senate -- Majority Leader Harry Reid (Nev.), Dick Durbin (Ill.), Chuck Schumer (N.Y.) and Patty Murray (Wash.) -- the executives pushed for broad cuts. But when pressed on tax breaks that benefited their companies, they defended the provisions.
As one CEO lectured the senators about fiscal responsibility, compromise and shared sacrifice, an aide to Reid passed the majority leader a note saying that the CEO's company had paid an effective tax rate of zero for the past year, according to a source in the meeting. Reid showed the note to Schumer, sitting next to him. "Don't do it, Harry," Schumer whispered, trying to head off one of Reid's famously biting rebuttals. Reid bit his tongue, but the credibility of the corporate titans had been undone.
Even without the grand bargain, the CEOs still won something. The final deal included special tax breaks that will give their companies hundreds of millions in savings.
Correction: A previous version of this article mischaracterized a loan value tax reform included in the Camp bill as benefitting homeowners. The provision would predominantly benefit owners of debt securities.