With all of the horrible financial havoc that financial swaps and other financial derivatives have played on the US and world economies, I think the last thing we want to do is to give tax incentives for any financial derivative, which believe it or not, we presently do.
The Big Financial firms arranging the swaps and other financial derivatives incur a lot of both upfront external costs, including outside professional fees, and upfront internal costs, including employee, employee benefit, travel, and other related costs, in designing, implementing and marketing these very complex swap and other financial derivative transactions.
And frequently, there are also lucrative compensation programs for various executives and employees in which compensation is based on measures such as fees and positive interest spreads earned in swap or other financial derivative transactions.
My proposal here is that all of the substantial upfront external and internal costs incurred by the Big Financial firm that end up resulting, either directly or indirectly, in the generation of the fees received by the financial firm related to the financial derivative, including an allocation of employee costs, related employee benefit costs, and related travel and other costs, as well as all compensation driven by the level of swap fees and other financial derivative fees, should not be tax deductible in the year these costs are incurred.
Instead, in all fairness, all of these upfront costs should be initially deferred for federal income tax purposes, and amortized over the life of the related swap and other financial derivative transactions. Thus, from a fairness standpoint, for federal income tax purposes, the entire costs related to the financial derivatives would be spread over the entire life of the financial derivative, which is how the income is also recognized.
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 apply this proposal to all Foreign Financial Institutions entering into these financial derivative transactions 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 from these financial derivative transactions will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big 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.
