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.
While I can see why they think this is only fair, the problem with this approach is that it would have a very severe continuing negative impact both economically and on the annual earnings of these Big Financial Corps.
I think there is a far better way here to fairly deal with this unfortunate situation, which still raises a very substantial amount of money from these large Financial Corps thus permitting the US Government to reduce its massive amount of debt, but which at the same time also substantially softens both the economic and earnings damage to these Big Financial Corps.
In my Tax Loophole Closer #1: 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. Thus, the Financial Corps wouldn’t lose any federal income tax deductions, but instead they would just get some of these tax deductions much later than they do now.
Now in this Tax Loophole Closer #2, 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 large Financial Subsidiaries of large Non-Financial firms, large Hedge Firms, large Partnerships, large REITs, and also including Foreign Financial Institutions 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.
Thus, the timing of the tax deduction of these deferred
costs would more fairly follow the
movement of the related financial assets and financial liabilities, which is
clearly the fair way they should be handled.
The Big Financial Corp wouldn’t be losing any federal income
tax deductions for these costs, but instead they would just be deducting some
of them much later than they do now.
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.
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, first below here are two of the highly relevant larger financial assets of just four of the largest US Financial Corps at December 31, 2011:
To get a better understanding of a large financial institution, first below here are two of the highly relevant larger financial assets of just four of the largest US Financial Corps at December 31, 2011:
| Loans | |
| 12-31-11 | |
| bils of $s | |
| Bank of America | 892 |
| Wells Fargo | 750 |
| JPMorgan Chase | 696 |
| Citigroup | 617 |
| Total all 4 | 2,955 |
| Available | |
| For | |
| Sale | |
| Debt | |
| Securities | |
| 12-31-11 | |
| bils of $s | |
| JPMorgan Chase | 362 |
| Bank of America | 276 |
| Citigroup | 257 |
| Wells Fargo | 219 |
| Total all 4 | 1,114 |
Under my proposal here, 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 massive Loan asset category above (total of $3.0 trillion for just these four companies) 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.
The large Debt Securities Available For Sale assets
(total of $1.1 trillion for just these four companies) 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 $3.0 trillion for just these four companies) 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 a couple of other relevant asset categories.
Trading Assets, another huge asset category for these four companies, 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 two of the larger financial liabilities
of these same four large US Financial Corps at December 31, 2011:
| Interest | |
| Bearing | |
| Deposits | |
| 12-31-11 | |
| bils of $s | |
| JPMorgan Chase | 762 |
| Bank of America | 694 |
| Citigroup | 689 |
| Wells Fargo | 676 |
| Total all 4 | 2,821 |
| Long-term | |
| Debt | |
| 12-31-11 | |
| bils of $s | |
| Bank of America | 372 |
| Citigroup | 324 |
| JPMorgan Chase | 257 |
| Wells Fargo | 125 |
| Total all 4 | 1,078 |
Just like for the assets explained earlier, for
a financial institution to obtain the financing of these two 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 two 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.
Thus, under my proposal here, first the financial institution should allocate all of the internal and external costs to each of these two 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.
And then turning to the income statement, here are the Total
Employee-Related Expenses and Total Non-Interest Expenses of these same four
large US Financial Corps for 2011:
| 2011 | 2011 | ||
| Total | 2011 | Total | |
| Employee | Total | Employee | |
| Related | Non-Interest | Expense | |
| Expenses | Expenses | Percentage | |
| mils of $s | mils of $s | ||
| Wells Fargo | 27,667 | 49,393 | 56% |
| Citigroup | 25,688 | 50,933 | 50% |
| JPMorgan Chase | 29,037 | 62,911 | 46% |
| Bank of America | 36,965 | 80,274 | 46% |
| Total all 4 | 119,357 | 243,511 | 49% |
So, clearly Total Employee-Related Expenses are huge for
these four companies, totaling a massive $119 bil in 2011, and comprising 49%
of Total Non-Interest Expenses.
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.
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.
Given how huge the Total Employee-Related Expenses of Financial Corps are, coupled with the fact that a very significant portion of them are related to Long-term Loans, to Debt Securities, to Interest-bearing Liabilities, and to Long-term Debt, there should be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
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.
Given how huge the Total Employee-Related Expenses of Financial Corps are, coupled with the fact that a very significant portion of them are related to Long-term Loans, to Debt Securities, to Interest-bearing Liabilities, and to Long-term Debt, there should be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Since the money raised by the US Government here is so gargantuan,
I would stagger it in so that the negative cash flow impact on these Financial
Corps isn't so large over at least the first several years.
