How Proposed Tax on Savings Would Affect U.S. Depositors
Savings accounts were in the limelight in Washington this week when the Treasury Department floated the idea of placing a charge, alternately being called a tax or a user fee, on bank deposits.
Reaction to this trial balloon was not pretty. Almost everyone hated it--bankers, savers and lawmakers--and some consumers even started thinking about withdrawing their deposits because they’re nervous and confused.
Here’s a thumbnail look:
Question: What exactly has been proposed?
Answer: An annual charge of 25 cents to 30 cents for every $100 that is on deposit at the nation’s banks, savings and loans and credit unions. That means that if you have a savings account of $5,000, you would get hit with an annual fee of $12.50 to $15.
Q: Why? What’s the money for?
A: To pay the estimated $100-billion tab for cleaning up the failures in the nation’s savings and loan industry. The Bush Administration and Congress are looking everywhere they can for money to solve this problem.
Q: How much would the levy raise?
A: As much as $9 billion a year. There’s more than $3 trillion on deposit at the nation’s banks, thrifts and credit unions--$2 trillion in the banks, $950 billion in the thrifts and $173 billion in the credit unions.
Q: When might such a levy be enacted?
A: Not any time soon. This would take congressional approval and Congress does not usually act quickly, particularly with an issue as touchy as this one.
Q: What are the chances the tax will be enacted?
A: Very slim at best. What’s going on now in Washington is the time-honored ritual of floating trial balloons to see what’s popular and what isn’t. This balloon did not get very far off the ground before the guns opened fire.
Q: What’s the main objection?
A: The principal worry is the levy would trigger massive deposit withdrawals, destabilizing an already fragile banking system. As has been repeatedly proved in the past, savers are not bashful about withdrawing deposits if they can get a better deal elsewhere. Another objection is that many savers don’t believe that it is fair for them to pay for problems they didn’t cause.
Q: Who typically keeps savings in banks and thrifts?
A: People who don’t want to take any risk. Many are retirees who have worked all their lives and don’t have time to earn another $50,000 nest egg. They put their money there mainly because it is insured up to $100,000 per account by government agencies such as the Federal Savings and Loan Insurance Corp. and the Federal Deposit Insurance Corp.
Q: So, is there any reason at all why I should withdraw my money now?
A: Probably not, but there are other safe investments if you’ve had it with the troubles in the nation’s banking industry.
Q: If I do withdraw my money, what are the penalties for taking money out early from a certificate of deposit?
A: Usually, you forfeit about three months’ back interest if you want your money before a CD matures.
Q: What are some safe alternative investments?
A: Treasury securities are attractive if you want investments that are backed directly by the U.S. government. These include Treasury bills, notes and bonds that can be acquired through brokers for fee. You can also invest in money market funds that invest only in Treasury securities.
Q: What if I want to keep my money in banks or savings and loans? What are the yields these days?
A: The state’s biggest thrift, Home Savings, is offering a yield of 8.45% on a one-year certificate of deposit. Bank of America, California’s biggest bank, is offering 8% on the same type of CD. By comparison, the recent rate on six-month Treasury bills has been about 8.3%. (On Page 3 of today’s Business section, yields are shown for certificates of deposit at many of the state’s financial institutions.)
Q: What are the experts saying about the proposed levy?:
A: Here a sample:
- Rep. Charles E. Schumer (D-N.Y.): “It makes bad economic sense and bad political sense, and that usually means it won’t go anywhere.”
- L. William Seidman, chairman of the Federal Deposit Insurance Corp.: “It’s the reverse toaster idea. Instead of the bank giving you a toaster when you make a deposit, you give them one.
- Lawrence A. Krause, a personal financial planner in San Francisco: “It’s so universally unpopular that it does not have a chance of passing.”
- Alexandra Armstrong, a financial planner in Washington: “There has been a violent reaction to this. My clients are very upset. They hate this idea.”
