Did I Say Dumb Tax Policy?

The S&P 500 dropped for the first time in 2010 yesterday, falling nearly 1 percent and ending a six-day New Year’s rally. You want to know why? It wasn’t China’s mild credit-tightening move to raise reserve requirements on their banks. That’s actually a good idea. It may help calm the threat of Chinese overheating. What knocked stocks down (including a 2 percent drop in the bank index and big losses all around for the major banks) is the new White House proposal for a $120 billion tax hike on banks.

Just look at the slaughter across the board: BofA, Citi, Morgan Stanley, Goldman, JPMorgan — all of them down 2.5 to 3.5 percent. This had nothing to do with China. What it’s all about is a ridiculous bank-tax proposal that is anti-growth, anti-capital, anti-profits, anti-shareholders, and anti-bank-lending.

The worst part about the proposal is that at the end of the day it’s going to be bank consumers who wind up paying the tax. Banks will pass the tax along.

But there are many more problems with this absurd bank-tax-hike proposal. Think of this: The U.S. government bailed the banks out with TARP. Then the banks repaid TARP last year, including the stock warrants that provided a handsome taxpayer profit from the banks. And now the government wants to tax them? In other words, help the banks get healthy, and then punish them? I don’t understand it.

And here’s yet another ridiculous part of this story: The largest banks that de-TARPed, and are regaining their health, are now, with this tax, supposed to cover the government-owned failures like GM, GMAC, AIG, and Fannie and Freddie, which are running up huge deficits because they may be on the taxpayer dole in perpetuity. In other words, the healthy banks that made good decisions and paid down TARP are now getting taxed so that the government can finance the bad actors. This makes no sense at all.

Look, the big guys have de-TARPed. Now it’s time to get off their backs. As I wrote yesterday, bankers should not get bonuses for the period in which they were TARPed. But for the new year, since the bankers met their TARP obligations, Team Obama should leave them alone. Let the bankers help the economy grow, create wealth, and create jobs.

It gets worse. On top of all this bank-tax stupidity, House and Senate Democrats now want to apply a Medicare payroll tax hike to fund Obama’s health-care plan. This would include taxing investments like capital gains and dividends rather than just wages. The wage hike is bad enough. And Obama’s health plan is bad enough. But applying this tax to investments simply raises the cost of capital, lowers the return on risk-taking, and damages prospects for economic-recovery growth.

What is Team Obama thinking?

I’ve never seen anything so dumb. No wonder stocks sold off yesterday, especially bank stocks.

If these tax hikes actually get through Congress and the White House in the weeks ahead, the stock market is going to sink no matter how good the fourth-quarter profits picture.

We cannot, and will not, tax our way into prosperity. It won’t happen.

Did I say dumb policy?