Last week we mentioned the "poll tax" argued to be implemented for banks. This week we want to continue with this subject. It is quite fruitful, let us clear the question marks in our minds.

We believe we sufficiently emphasized that imposing an annual tax per branch from banks is not very smart in terms of design. Moreover, we also underlined that the discourse of the regulation seemed a bit pre- Magna Charta. You cannot just say "I have to finance that project" and invent new taxes whenever you get into trouble. The realm of tax policy is not suitable for coming up with new inventions overnight. If you let at the first time, they will do it again and again. As inventing new taxes once faced with a trouble will reduce foreseeability down to zero, it is quite bad considering the stability of investment climate. They first invented a 2 kurus per liter tax on fuel prices to finance "Istanbul 2010 - European Capital of Culture" events. And now they are talking about imposing poll tax on banks to finance something else. I wonder what else we will see. But in any case the first point to state is apparent: It is better not to go too far.

And today's subject: it is the 'financial crisis responsibility fee' for American banks brought about in the USA by President Obama. Turkey's attempts for a poll tax are surely nonsense; but does this attempt in US make sense? Let us see.

On January 14, President Obama declared that he is considering a financial crisis responsibility fee for large banks and that the cost of the public resources used to tackle the crisis will be financed through this fee. And as a result, a new tax was on large American banks was introduced. It is expected that the tax rate will be low; at or even below 0.15 percent. Tax base will be constituted of a part of balance sheet liabilities; i.e. the tax will be collected upon the size of the balance sheet. Local banks and banks with balance sheets below a certain level will be exempted from this tax.  The issue is not moved on to legal grounds yet, but there are fact sheets on both Whitehouse website and US Treasury website. So, is this regulation also nonsense? We offer a "No, US's regulation is not nonsense as Turkey's regulation" together with a "Yes, US's regulation is as nonsense as Turkey's regulation."

First, the idea in their mind is not nonsense: US banks are rightfully considered to be responsible for the crisis. Due to the financial crisis, US government has channeled million dollars of public funds to banking sector. So, collecting a premium from banks' balance sheets to cover the costs appears quite legitimate in political terms. In fact, Obama was too late to bring about such a proposition. The meaning of failing to take this step in time was demonstrated by the last senate elections in Massachusetts: the elections to replace the legendary Democrat leader Edward Kennedy was won by Republican Party. Democrats lost a base despite the strong support of the Kennedys.

In the US, the government intervened in the crisis one way or another and as a result of this intervention directly transferred funds to the creators of the crisis. This has a political cost. Obama's announcing this fee in mid-January can be considered as an attempt to limit that political cost also taking into account the lost election. However, in any case, the new tax of the US has a rationale. Turkey's new tax, however, does not. Since the government did not take any measure but just watch the crisis, it is not possible to accuse them of supporting banks out of public funds. Therefore, the tax attempted in Turkey does not have such rationale.

Second, US's attempt is as nonsense as Turkey's attempt: among the targets of the former, one is to put a heavier burden on the shoulders of banks with large balance sheets.  This way, it is sought to put a limit on banks' activities other than traditional banking activities and as well as on their large balance sheets. Such large public funds were allocated in this crisis as the bailed out banks were too large. The banks were too large that the government feared of the adverse economic cycle their bankruptcy would cause. As a result, banks' being "too-big-to-fail" led the mobilization of public funds to prevent their bankruptcy. So, the government is aiming to punish having a large balance sheet and thus limit such systemic risks. This is what Whitehouse says.

It is clear that fiscal policy and taxation cannot replace financial regulations. Imposition of additional taxes on large balance sheets would at the utmost encourage banks' quest for more profitable operation areas. It urges them to take higher risks. If things go out of control when the balance sheets expand, they feel secure as they know they are going to be rescued. Therefore, collecting "financial crisis responsibility fee" from large banks does not warrant banks' keeping small balance sheets. It does not give the actors in the system the correct incentive. In this respect, what Obama attempts does not make sense. The increasing need for system restructuring and public regulation prevails.

A politically correct action is not necessarily economically correct. It is necessary to distinguish between an act to satisfy the sense of justice and an economic act.

What is the difference between Turkey and the US in this context? In the latter, the political is not an impediment to the economic. Here in Turkey, the new political tax has the potential to affect the economy adversely by disturbing the investment climate.

Poll tax is nonsense.

This commentary was published in Referans daily on 21.01.2010