The excessive greed of a handful of Big Financial Corps played a key role in the meltdown of the US economy. And many US citizens, as well as many smaller businesses, are still suffering severely from the aftershocks of this financial meltdown.....but, Big Corps, not suffering so much.
Many pundits have wanted to assess a substantial annual tax on these Big Financial Corps, and to use the tax proceeds raised to reduce the US Deficit.
The problem with this approach is that it would impact the annual earnings of these Big Financial Corps, some of whom are still suffering.
I think I might have a better way to fairly deal with this situation, by still raising a substantial amount of money from them for the US Government to reduce its massive amount of debt, but at the same time, by also softening somewhat the economic damage to these Big Financial Corps.
In my Big Corp Tax Loophole Closer #2: Upfront Costs on Big Financial Derivatives, I proposed that all external and internal upfront costs related to all financial derivatives of Big Financial Corps should be deferred, for federal income tax purposes, and amortized over the life of the related financial derivatives.
Now in this Big Corp Tax Loophole Closer #11, I am expanding these upfront costs to include all of the same internal and external costs related to all financial instruments of these same Big Financial Corps, including Foreign ones operating in the US.
Financial instruments are a very broad category and include all of the many large financial assets and large financial liabilities on the balance sheet of a financial institution.
Thus, my proposal here is to review all of the huge dollars of financial assets and financial liabilities on the balance sheet of a Big Financial Institution, and determine how these financial assets and financial liabilities got there and what length of time they will stay there on the balance sheet. Further, my proposal here is for all the upfront costs, both external and internal ones, necessary to set up these financial assets and financial liabilities are not tax deducted immediately, as they are presently, but rather are all initially deferred, for federal income tax purposes, and allocated to the related financial asset or as reduction to the financial liability. Then the timing of the tax deduction of these deferred costs would follow the movement of the related financial assets and financial liabilities.
There are substantial amounts of internal financial institution costs incurred necessary to acquire each of the financial assets and financial liabilities. These would include employee salaries, commissions, incentive compensation, employee benefit costs, travel and many other costs. And there could also be a lot of external costs to acquire these assets…examples would be items like external legal costs and CPA firm services for accounting and tax advice. Many of these costs are presently tax deducted immediately, when incurred.
To get a better understanding of a large financial institution, below here are the relevant large financial assets on Wells Fargo's balance sheet at Dec 31, 2010:
………………………………………......................Asset
…………………………………………....................Mix
Securities Available for Sale…...$173 bil (14%)
Loans…………………………............$734 bil (58%)
Total Assets…………………........$1,258 bil
And on Wells Fargo’s 2010 income statement, here are the key employee costs:
Salaries……………………………………….................$13.9 bil
Commissions and Incentive Compensation…...$8.7 bil
Employee Benefits…………………………….............$4.7 bil
Total Employee Related Costs………………........$27.3 bil (54%)
Total Non-interest Expenses………………..........$50.5 bil
The first step is to allocate all of the bank’s internal costs and external costs to each of these asset categories. Then, these costs need to be allocated further to each separate asset within each asset category.
The large Securities Available For Sale assets are mostly those nebulous debt securities that are not going to be sold in the near future, but neither are they acquired to be held to maturity. Thus the intent is to sell them at some point of time down the road. Thus, my proposal here is that all internal and external costs necessary to acquire the Available for Sale Securities, should be initially deferred for federal income tax purposes, and subsequently amortized over the life of the debt security.
The massive Loan asset category above (total of $734 bil) all have terms. Thus my proposal here is for all internal and external costs necessary to acquire these loans should be initially deferred for federal income tax purposes, and subsequently amortized over the term of the related loans.
There are couple of other relevant asset categories.
Trading Assets are ones that are planned to be sold in the near term. My proposal is that for federal income tax purposes, all internal and external costs necessary to acquire Trading Assets that are debt securities, should be amortized over the debt life. All internal and external costs necessary to acquire Trading Assets that are equity securities should not be tax deductible until those assets are sold.
Companies' Mortgage Servicing Rights assets have economic lives used in their audited financial statements. Thus my proposal is that all internal and external costs necessary to acquire Mortgage Servicing Rights should be initially deferred for federal income tax purposes, and subsequently amortized by using their economic lives, rather than by using the present artificial tax life.
And here are the relevant large financial liabilities of Wells Fargo at Dec 31, 2010:
……………………………………………………...............% of
……………………………………….............................Total
………………………………………………….................Assets
Interest-bearing Deposits……………….$657 bil (52%)
Short-term borrowings………………….....$55 bil (4%)
Long-term debt…………………………......$157 bil (7%)
Just like for the assets explained earlier, for a financial institution to obtain the financing of these three categories of liabilities, there had to be substantial internal bank costs incurred. These would include employee salaries, commissions, incentive compensation, employee benefit costs, travel and many other costs. And there could also be a lot of external costs to obtain the financing here, as well.
Thus, under my proposal here, first the financial institution should allocate all of the internal and external costs to each of these three categories of liabilities, and then allocate them further to each specific debt instrument. For all of these liabilities that have a fixed term, all of the related internal and external costs should be initially deferred for federal income tax purposes, and subsequently amortized over the term of the related liability.
I wouldn’t apply this corporate tax loophole closing to smaller US financial institutions, but just to the clearly very large US Big Financial Institutions. I would also apply this proposal to all large Foreign Financial Institutions operating in the US.
The economic damage to the US Big Financial Firms from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these costs will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big US Financial Institutions from my proposal.
There should be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
