Basel III and the Obama Tax Hike

Here is something you might not have known: at the end of the year, the tax rate on dividends and capital will go up 25 percent as the current rate set temporarily in 2003 expires. This will decrease the number of equity investors in banks, and increase the desire for bank debt, especially since debt interest can be deducted. With banks facing higher capital requirements from the Basel III agreement reached over the weekend they will need to raise that money somewhere. Equity investors will not be lining up at the door. So banks will have to either make more money and hold onto their cash, or cut down on lending to bring their ratios into compliance.

Now, bank profits have been under attack lately. The CARD Act was the first wave. The attack on debit card transaction fees in the Dodd-Frank Act and establishment of a Consumer Financial Protection Bureau was viciously landed rabbit punch. The new derivative rules and propriety-trading ban was a staggering blow to the gut. Banks will move forward through these limits, and continue to be profitable, but not in the same degree that they would have been otherwise.

Translation: ending the Bush-era tax cuts on dividends and capital gains will likely mean less money invested in the economy and more cash sitting in bank vaults.