The Debit Card Stealth Tax
Over the weekend, one of the most ill-conceived reforms of the Dodd-Frank Act went into effect: the Durbin Amendment. Stripped to its core, the amendment sets price controls on the fees that large banks can charge to their debit-card customers. Since banks now have to look elsewhere for this lost revenue, they are imposing monthly debit-card charges on customers.
Bank of America has, according to New York Times reporters Ron Lieber and Ann Carrns, the "nerve" to impose a $5 monthly debit-card fee on most of its customers—except for those who maintain high bank balances. Other banks have imposed smaller fees between $3 and $4. Still others have stood pat for now.
Those fees turn out to be a big deal. Though Lieber and Carrns denounced the fees as a "tax on pretty much every customer without a healthy salary," they did not bother to point the finger at Senator Durbin for the tax. Lieber and Carrns urged customers to bank elsewhere. Given that threat, they may have to. As George Mason Law’s Todd Zywicki reports in the Wall Street Journal, small branches are closing, free checking accounts are evaporating, and marginal customers are being driven from the banking system to cash exchanges, pawn shops, and high-priced prepaid cards. There is no magic with price controls. They do for banking what they do everywhere else: create product shortages and spawn regulatory intrigue.
During this time of economic distress, why would Congress enact legislation that simultaneously cuts the profits of banks and taxes ordinary Americans? We need to repeal the Durbin Amendment right away or else risk further damage to our fragile economy. I have more to say about all of this over at Defining Ideas.
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Mar '11
Re: The Debit Card Stealth Tax
Yet another splendid idea from the mind of Dick Durbin, Pride of the Pudd'nheads.
And people wonder how Blagojevich got elected.
P.S. Access denied? Professor, is the Hoover Institution going underground?
P.P.S. Ah, closed for maintenance. Internet elves need time to cobble the site together.
Edited on Oct 4, 2011 at 5:02amMay '10
Re: The Debit Card Stealth Tax
Dick Durbin isn't as ignorant as he sounds (that would be impossible, he has to work at it).
Consider his constituency here in the kakistocratic Peoples Republic of Illinois, where the Emirs of Incumbistan [ht Mark Steyn] choose their constituents, not the other way around.
All most of them understand is "my bank is sticking it to me, off the man, no justice no peace, etc., etc.,"
The idea that handling a debit card transaction has to be paid for somehow by someone is a completely foreign concept to them.
Dec '10
Re: The Debit Card Stealth Tax
What the banks haven't explained is why there are any costs at all associated with debit transactions.
I'm not sure that I could tell you what said costs would be.
Aug '10
Re: The Debit Card Stealth Tax
AmishDude: What the banks haven't explained is why there are any costs at all associated with debit transactions.
I'm not sure that I could tell you what said costs would be. · Oct 4 at 5:16am
It's called making a profit and if you're a CEO and your profits aren't increasing you will quickly find yourself out of a job!
This is what idiots like Durbin and other career politicians will never understand; banks are publicly traded companies that must make a profit - an increasing, not decreasing profit - to remain viable.
People that quibble about how much profit a company makes simply do not understand how free enterprise and capitalism works. It's not a pefect system but it beats the heck out of anything else...
May '10
Re: The Debit Card Stealth Tax
AmishDude: What the banks haven't explained is why there are any costs at all associated with debit transactions.
I'm not sure that I could tell you what said costs would be. · Oct 4 at 5:16am
Yes, the cost of building a vast network of fast, highly reliable servers is huge.
I believe that the banks have repeatedly tried to explain the costs, but our friends in the liberal media have done their best to ignore all those inconvenient facts.
Jun '11
Re: The Debit Card Stealth Tax
How do we get ourselves in the position of defending the privileges of one of our most protected industries? Isn't the banks' ability to reap these fees protected by regulatory barriers to entry?
Frankly, I'd be a bit more sympathetic if retailers were allowed to enter the banking business.
Jun '10
Re: The Debit Card Stealth Tax
Fricosis Guy
How do we get ourselves in the position of defending the privileges of one of our most protected industries? Isn't the banks' ability to reap these fees protected by regulatory barriers to entry?
Frankly, I'd be a bit more sympathetic if retailers were allowed to enter the banking business. · Oct 4 at 6:36am
Interesting point. The bank got themselves into the protections of crony capitalism, and it is tempting to enjoy them getting burned in their own fire.
Except it is not the banks who will suffer form the $5 per month fee, but the mostly lower income folks who pay the fee. The Durbin Amendment illustrates inevitable stupidities to be expected in a highly regulated industry, where regulatory changes will have unintended consequences.
Dec '10
Re: The Debit Card Stealth Tax
Thanks for the warning Dr. Epstein. I think from now on a hidden tax on the poor created by an idiot left wing politician should be called a "Durbin".
Mar '11
Re: The Debit Card Stealth Tax
Here's the guy who set this into motion in the first place telling people to blame the bank for responding to it. But don't worry, we in Illinois won't deprive the Senate of his blinding and insightful leadership; he'll still be re-elected. Those of us living on debit cards instead of piling up credit card balances have made the conscious decision to live within our means. Perhaps we ought to issue Congress a debit card and tear up its credit card.
Sep '10
Re: The Debit Card Stealth Tax
Hoover is down, but based on your post you disappoint. The cost and revenue earned from debit cards has always been born by consumers. Merchants were billed by banks and passed it on to consumers. All the consumers paid for the debit cards if they used them or not. I oppose Dubbin's price controls, but seeing as how the poorest 20% generally have no bank accounts they will be positively effected and cost of of using debit cards are now more not less visible. There are good reasons for opposing Dubbin's cost control dictate,but not the ones you mention in your post.
Jun '11
Re: The Debit Card Stealth Tax
Link to the Defining Ideas article is bad. Here's the good link: http://www.hoover.org/publications/defining-ideas/article/95011
Re: The Debit Card Stealth Tax
Percival:
P.S. Access denied? Professor, is the Hoover Institution going underground?
P.P.S. Ah, closed for maintenance. Internet elves need time to cobble the site together. · Oct 4 at 4:56am
Edited on Oct 04 at 05:02 am
Looks like the wrong link was accidentally included. Try this one (it's now fixed in the post, too)
Mar '11
Re: The Debit Card Stealth Tax
Richard Epstein:
During this time of economic distress, why would Congress enact legislation that simultaneously cuts the profits of banks and taxes ordinary Americans?
Err, Socialism? Just a wild guess.
Nov '10
Re: The Debit Card Stealth Tax
The left is under the delusion that we're always just one more law or regulation away from bringing those evil corporations to heel. Businesses exist to make money. When the government arbitrarily imposes new costs on a business, or cuts off revenue streams, it will try to get that money back somehow. Anyone who believes that businesses would just roll over and say "Oh well, I guess we'll just have to make do with lower profits." clearly needs to get out more.
The cycle keeps repeating itself. The government tries to take money away from a business. The business tries to recover that money, sometimes by doing something worse than what the government was trying to stop in the first place. Finally, the government reacts with shock and outrage that the business would react in (what is for most of us) an entirely predictable way, without once considering its own role.
Apr '11
Re: The Debit Card Stealth Tax
This is a good point. Retailers may enjoy the smaller merchant fees on their bill, but the windfall will only be temporary. Banks will find ways to make that money back, whether they follow BofA's path or not. Consumers have and always will pay for the costs of doing business.
The silly tinkering done by this amendment demonstrates the short-sightedness of economic illiterates like Durbin. Markets are organic and will find a way around regulations. However, it will be a lot easier for big banks than small banks. Way to fight the power-broking corporations for us prols, Senator!