Monday, April 11, 2016

Are Wall Street Banks Paying Their Fair Share of Taxes?

Residents of New York are being graced by the five remaining Presidential candidates. John Kasich finally figured out how to get a nice Italian meal while Hillary Clinton struggles with the subways. Bernie Sanders is running a commercial that will likely get Jamie Dimon calling his tax director to mansplain the fact that JP Morgan Chase pays around $8 billion in income taxes per year. Bank of America paid over $6 billion in income taxes last year. But before we accuse Mr. Sanders of not doing his homework, let’s remember that both of these banks have very high levels of pretax income. Both of these banks also have effective tax rates below 30% even though the U.S. Federal tax rate is 35%. How did that happen? The 10-K filing for JP Morgan Chase includes passages such as:
Tax-exempt income…Represents securities which are tax exempt for U.S. federal income tax purposes…Non-U.S. subsidiary earnings…Predominantly includes earnings of U.K. subsidiaries that are deemed to be reinvested indefinitely.
10-K filing for Bank of America notes:
The effective tax rate for 2013 was 29.3 percent and was driven by our recurring tax preference items and by certain tax benefits related to non-U.S. operations, partially offset by the $1.1 billion negative impact from the U.K. 2013 Finance Act, enacted in July 2013, which reduced the U.K. corporate income tax rate by three percent.
The UK income tax rate is 20% and if these banks strangely used transfer pricing to shift income out of the UK into the US, their income tax authority would surely object. Of course the IRS should make sure income shifting is not going the other way. But I know of no evidence that either bank is abusing transfer pricing to avoid U.S. income. The other item in both of their 10-K filings relate to the tax exemption for municipal bonds. During those debates this week, maybe someone should ask Mr. Sanders if he wants to end this subsidy for state and local governments. If he does, is he proposing more Federal revenue sharing? If not – I fear more stupid state fiscal austerity.


Peter said...

No link to the commercial?

Democratic Party hack defending the big banks.


Bruce Wilder said...

No word on what the net to JP Morgan Chase is?

Kristof brings attention to an Oxfam study that claims, "From 2008 – 2014 the 50 largest US companies collectively received $27 in federal loans, loan guarantees and bailouts for every $1 they paid in federal taxes."

During the Obama Administration, the Treasury Department was treated as a joint subsidiary held in condominium by all the big banks, led by Goldman Sachs and Citibank. After collecting her infamous speaking fees, we are supposed to believe the Hillary is going to do better?

ProGrowthLiberal said...

Bruce - GAO has a good discussion of how little certain US companies pay in taxes. One problem I had with it, which is the same issue I had with a Bernie Sanders oped on Bank of America, is that they were shocked that companies who reported losses paid no taxes. Of course an entity with no profits paid no taxes.

The problem is when companies move income to tax havens so they pay low taxes even when they do have high income. Apple is the classic one. Yes they pay a lot of taxes but as a share of their profits - not so much.

As far as after-tax income for JP Morgan Chase and BofA, it tended to be around 71% of their pretax income. That is what I meant by an effective tax rate of 29%. It is all detailed (in gory detail) in their 10-Ks. I did briefly look at Citibank's financials and their effective tax rate was 35%.

There is a lot of income shifting going on but the banking sector is not the main culprit. Try Big Pharma.

Myrtle Blackwood said...

Re: "But I know of no evidence that either bank is abusing transfer pricing to avoid U.S. income."

The Panama Papers (and associated revelations) reveal just how much we don't know until someone hacks into the files and leaks them.