Who is Paying for the Financial Bailout?

It is frequently said that the taxpayer is paying for the $700b that is being used to stabilize the financial system. In a sense this is true in that the government is incurring debt that will have to be repaid someday. However, taxes have not been raised for anyone to fund the TARP program.

However, savers are the one group who are currently paying real dollars to fund the recapitalization of the financial system. In order to recapitalize the banks to prevent bank failures, the Federal Reserve significantly reduced the federal funds rate. Essentially, this increased the income to the banks by increasing the spread which was accomplished by lowering the interest rate that banks pay to borrow funds.

Total interest, both taxable & tax exempt, reported to the IRS by individual tax payers in 2007 was $347.41b ($268.1b taxable interest). Assuming that interest rates earned by tax filers declined 80% from 2007 and that balances in accounts on which interest is taxable remained constant, reduced interest rates will reduce treasury tax receipts by $56.4b and will reduce the interest income of US taxpayers with savings by $277.93b. This $277.93b is a direct transfer from US taxpayers who are savers to bank balance sheets.