Bank-Tax Shenanigans.

There is an extraordinary amount of confusion surrounding the proposed bank tax designed to recoup the losses associated with bailing out Wall Street in 2008, and the fee proposed to create a fund that would cover the costs of liquidating the banks in the event of a future crisis. That's how you get reporting like this:

Despite the push from the Obama administration, the prospects for the "bank tax" remain uncertain. During a congressional hearing Tuesday, [Treasury Secretary Tim Geithner] said the tax provision was "an important complement" to a bill now before the Senate to overhaul financial regulations.

But some Democrats said they are reluctant to include the tax because it could complicate prospects for the hotly contested overhaul bill. They added that Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, is instead considering whether to include a new bank tax in a bill he plans to introduce extending some existing tax cuts.

But it doesn't matter if this tax is included in the financial-reform bill or not, as long as it is passed. The tax is a straight-up revenue-producing measure with a side benefit: It provides a framework for taxing banks to reduce their size. Meanwhile, the wind-down fund is capped at $50 billion and intended to cover the costs of future liquidations, not to increase revenue. Yet because Republicans have convinced Democrats to remove the fund from the financial-reform bill, a move that has little substantive impact but allows the GOP to save some face, people are now questioning the viability of the tax.

Irony of ironies, the reason that removing the liquidation fund doesn't impact the function of the financial-reform bill is that Treasury plans to loan the money to cover liquidation to the FDIC, with the intention of making good on the loan with asset sales from the liquidated bank and a bank tax like the one Geithner testified about yesterday. That's right: The decision to remove the liquidation fund has raised questions about the viability of a bank tax, which at the same time makes the need for a bank tax all the more pressing.

Now the controversy over the liquidation fund has somehow infected the bank tax, which was announced in January as an individual program that is separate from the broader financial overhaul. But while both are good ideas, we can get by without the liquidation fund. It's foolishness not to pass this bank tax that will both cover the costs of the last bailout and give us a framework for imposing a levy on banks into the future.

-- Tim Fernholz

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