Biggest Tax Cheats Aren’t the 47% — They’re BANKS

by Jeff Reeves | September 20, 2012 6:00 am

There’s a kerfuffle going on right now about the 47% and people who are “takers” instead of “makers.”

I won’t bog this column down with specifics because I’m sure you know by now: Broadly speaking, Mitt Romney has highlighted the fact that 47% of Americans pay zero income tax[1]. Supporters of Mitt say the figure is just one data point proving we are a freeloader nation, and detractors say that’s an oversimplification because many middle-class (and even upper-class folks) can sometimes pay zero income tax.

There is even widespread speculation that, like so many rich folk who paid zilch in 2009[2], Mittens himself paid no income tax that year thanks to losses he incurred on investments during the downturn … so who’s the freeloader here?

But I digress. You can debate the politics amongst yourselves — but the tax issue I’d like to focus on today is the legal corporate tax dodges going on right now.

Specifically, those at big businesses.

Now I’m not saying that we should gouge corporations; obviously, high taxes hurt profitability. But paying companies instead of collecting a penny? That just seems ludicrous.

Consider that in 2009, Exxon Mobil (NYSE:XOM[3]) made $19 billion in profits … Exxon not only skipped out on the federal income check, but it actually received $156 million back from the IRS, according to its SEC filings. Chevron (NYSE:CVX[4]) “only” got a $19 million refund despite $10 billion in profits for 2009.

Big Oil gets tons of subsidies and tax breaks, but the industry is nothing compared with the financial sector.

One of the biggest breaks out there is the American International Group (NYSE:AIG[5]) tax mess. As I reported in March[6], the company’s “profitable” fiscal 2011 was predicated on a roughly $17.7 billion tax benefit!

Or consider that Bank of America (NYSE:BAC[7]) received a $1.9 billion tax refund from the IRS in fiscal 2011 … even though it made $4.4 billion in profits and received a bailout from the Federal Reserve and the Treasury Department of nearly $1 trillion! And Citigroup (NYSE:C[8]) made more than $4 billion in profits that year, along with a $2.5 trillion bailout, but paid no federal income taxes.

In 2008, Goldman Sachs (NYSE:GS[9]) only paid 1.1% of its income in taxes even though it earned a profit of $2.3 billion and received an almost $800 billion helping hand from the Federal Reserve and U.S. Treasury Department.

So please, let’s not take aim at the small fishes out there dodging taxes on $20,000 a year. Seems to me just collecting a percentage point or two of this billion-dollar cash flow would do a heck of a lot more toward plugging the budget gap.

There’s a broader philosophical question at play here, of course. That is just how much we should incentivize people or corporations through tax breaks — and how much we should reasonably expect everyone to pay.

Jesse Eisinger writes a great piece on ProPublica dubbed “Tax Moochers: The Banks.”[10] It’s well done and you should check it out in full, but here are the highlights. I’ve edited out some with ellipses to keep things brisk and hit the high notes:

“Sure, banks pay taxes, but they pay a lot less thanks to a giant and underappreciated distortion in our nation’s tax code. … It’s the tax code’s favoring of debt over equity. …

What isn’t well appreciated is how much the debt deduction helps the banks. The first way is direct: Banking is a highly leveraged industry. Banks use more debt than equity to finance their activities. The tax break makes the debt cheaper and encourages banks, at the margin, to gorge on more. …

More important, there’s an indirect and unremarked benefit. Banks help companies raise money in two main ways: through the sale of stock (equity) and debt, either through loans or the sale of bonds. When a company goes public, selling stock for the first time, the underwriting banks make more money than they do for a comparable debt offering. But banks make it up on volume with debt. Bonds expire. Companies issue more of them all the time.

Partly because of the tax code distortion, corporate debt is underpriced and overconsumed by the bank’s corporate customers. Indeed, the debt business dominates the world of investment banking these days. When corporations raise more debt compared with equity, that fattens bank profits.”

Simply put, since banks deal in debt and debt is a write-off, banks get to dodge taxes on a huge portion of their normal business operations.

This is damning for two reasons. First and most obviously, it hurts tax revenues for the government and provides preferential treatment to this industry above others. But the more troubling fact is that the tax code encourages debt at banks and at businesses in general.

That got us into the financial crisis to begin with! Companies like Lehman and Bear Stearns evaporated due to overleverage, but big retail banks like Bank of America and Citigroup also got in over their heads.

And according to the tax code — and shrewdly pointed out by Eisinger — it’s actually more lucrative for banks to encourage other businesses to float debt offerings, too, rather than pursue equity stakes.

The tax code clearly needs to be cleaned up on many levels. But it seems like the big breaks given to banks and the preferential treatment we give to debt is something most people will be frustrated with.

Conservatives rail against debt, liberals rail against the big banks and those in the middle just want a system that isn’t going to fall apart. Seems like the time is ripe to tackle the issue of corporate tax moochers now — starting with the big banks.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[11] Write him at editor@investorplace.com or follow him on Twitter via@JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

Endnotes:
  1. 47% of Americans pay zero income tax: http://investorplace.com/investorpolitics/romney-explains-secretly-recorded-victim-remarks/
  2. like so many rich folk who paid zilch in 2009: http://money.cnn.com/2012/06/07/pf/taxes/rich-who-owe-no-income-tax/index.htm
  3. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  4. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  5. AIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=AIG
  6. As I reported in March: http://investorplace.com/2012/03/dont-fall-for-the-lies-about-aig-profits/
  7. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  8. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  9. GS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GS
  10. “Tax Moochers: The Banks.”: http://www.propublica.org/thetrade/item/tax-moochers-banks
  11. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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