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Taxation of banks

by Kurt Schuler September 5th, 2011 10:26 pm

Banks present a tempting target for taxation because that’s where the money is. As with other forms of corporate taxation, though, who pays the tax to the government and who ultimately pays it can be two different things. This point is both so elementary and so important that if you hear somebody claim that the solution to raising more government revenue is to tax corporations rather than people, you can dismiss him as an ignoramus. Failing to understand it shows an inability to do what the economist Thomas Sowell calls “thinking beyond Step 1.” Step 1 is the levying of the tax. The further steps, which involve thinking about what happens next, are what Sowell considers to be the essence of the economic way of thinking.

Somebody, literally some body, has to pay the tax. That somebody is a combination of the customers, employees, suppliers, and shareholders of the corporation. A tax on bank profits, for instance, reduces the amount that banks can pay to depositors, bank tellers, furniture makers who supply bank offices, shareholders, etc.

If you don’t find the argument convincing, think about a tax on gasoline. The gasoline does not pay the tax because it is inanimate. Oil companies collect the tax, but the people who pay most of it are drivers, every time they fill up the tank. Or think about a property tax. As anyone who owns a house knows, the property itself does not pay the tax; the property owner does. If he rents out the property, it becomes a charge he tries to recover from renters.

There are only three logical reasons to tax corporations. One is that because of the way the tax code is written, some income that would otherwise be taxed as individual income escapes taxation by being sheltered by the corporate form. In that case, the best way to address the problem is to reform the tax code. The second reason to tax corporations is that it is more efficient, since there are many fewer corporations than there are individual taxpayers. Before the rise of the welfare state, this reason might have made sense. To generate the huge amounts of money necessary to run the welfare state, though, governments create tax collection agencies to keep tabs on the finances of millions of individuals. The final reason to tax corporations is to hide the effects from people who can’t reason beyond Step 1. I think this is the dominant reason for taxing corporations, including banks.

8 Responses to “Taxation of banks”

  1. avatar Paul Marks says:

    Milton Friedman often argued that corporations should not be taxed as this was a form of double taxation (as the profits would be taxed again when they got to the shareholders). Although I would certainly agree that company taxation is much too high in the United States (most enterprises do not have the political connections of General Electric - they actually have to pay the insane levels of taxation in the United States), I am far from sure about the Friedman argument that companies should not be taxed at all.

    It seems to me that whilst indivduals have to pay income tax then so should companies have to pay - otherwise the corporate form is given a tax advantage over the owner manager form (and remember the managers of a corporation do NOT have to be shareholders - so the "double taxation" argument does not apply). Certainly companies should not be taxed any more than individuals - but they should not be taxed any less either. Of course individual Federal income taxes in the United States at a top rate of 35% are much too high - there are many nations where the top rate of income tax is now 10% (remember individuals would still have to pay State and local income taxes and I certainly do NOT believe that they should be able to deduct their State and local income tax from the income that is liable for Federal taxation).

    "But what about the deficit?" - true a reduction from 35% to 10% (for both individuals and companies) WOULD mean a real loss of revenue, however the actual problem in the United States is that government SPENDING is out of control (not that tax revenue is too low). Be that as it may, I do not think that it can be honestly argued that a reduction of the top rate (for both individuals and companies) down to 25% (from the present 35%) would mean a real loss of revenue over a period of years - indeed (again over a period of years) revenue might actually go UP over what it otherwise would have been (as it always has with tax rate reductions at the higher rates in the past). So if the aim is getting the maximum long term revenue tax rates (for companies or indivduals) over 25% simply make no sense.

    Also if we are really "anti corporate" (as some on the "liberarian left" would claim to be) - we would be campaiging for an end to the CAPITAL GAINS TAX and the DEATH TAX. It is these two taxes that really give the corporate form its tax advantage of the owner manager form - individuals (such as family owned business enterpries) are hit by these taxes, corporations are not really hit by them. It is no accident that true "corporatists" (such as Warren Buffett) are very much in favour of the Capital Gains Taz and the Death Tax (indeed want to see them even higher) as they hate indivdual and family owned business enterprises (Warren B. even went to Germany to campaign for the Death Tax to be applied to family owned companies, so the owners would be forced to sell out to his corporation in order to protect their children from taxation, truly the man is a "vampire" who seeks to suck the life blood from the heart of industry and commerce).

    Lastly - special taxes on banking over and above taxes on other companies.

    I agree with Kurt Schuler that special taxes on banks (over and above what other companies pay) are absurd - ACCEPT......

    Of course banks are massively subsidised by governments - via Central Banks ("lenders of last resort") and other means.

    Whilst these subsidies exist (including the vile "too big to fail" doctrine) banks can not be defended from taxation.

    And I speak as no enemy of the corporate form (I despise the "libertarian" left as much as I do any other form of the modern left) - but whilst the subsidies for banks remain, an honest defence of them against special taxation simply can not be made.

    Of course Kurt Schuler totally opposes the government subsidy of banking - I certainly do not mean to imply that he does not.

  2. avatar RickDiMare says:

    In his essay "Of Taxes," David Hume described a need to distinguish between direct and indirect taxation because "a people [can] be altogether ruined" by taxes that fall directly on them, or by taxes that require them (as does the annual personal income tax) to deal directly, one-on-one, with the tax collector. What Hume (and later the framers who tracked his thought) was saying is that, not only is it elementary to determine "who pays the tax" and "who ultimately pays it," it is even more important and elementary to determine what KIND of tax it is, and HOW it is collected.

    Hume states that direct taxes (taxes that fall directly on people because of ownership of something) are "dangerous [because] it is so easy for the sovereign to add a little more, and a little more, to the sum demanded, that these taxes are apt to become altogether oppressive and intolerable." Hume then states his preference for indirect taxes on commodities because this kind of tax "checks itself" and the taxing authority soon learns "than an increase [in the tax] is no increase of [its] revenue. It is not easy, therefore, for a people to be altogether ruined by such taxes."

    So, Kurt, with all due respect to your argument, I have no objection to paying taxes on gasoline, no matter how high the INdirect tax may be, because there is a built-in checking mechanism and I'm not directly dealing with the tax collector. Rather, the various levels of oil corporations are collecting the tax for me, which is their Constitutional duty as legal entities or special "persons" who have been extended various privileges by the sovereign government.

    Also, given your property tax example, any direct federal tax on my property is checked in a different way, by the Apportionment and Proportionment Clauses (the Direct Tax Clauses under Article 1, Sections 8 & 9). So, likewise, I have no problem with this kind of tax, even though it is falling directly on me, because I know the tax will be proportional to the given whole of a class of property and that it will be fairly apportioned among the 50 states.

    So, maybe there should be a fourth logical reason to tax corporations: they have been historically created and designed to assist the sovereign in collecting taxes, or in other words, they exist as artificial legal persons solely because of government decree or chartering.

    The whole legal authority for taxing employers on their paid-out wages under the 1937 Social Security Cases I mentioned earlier was based on this reasoning, i.e., that taxing employers (whether incorporated or not) for paid-out wages is NOT a direct tax on labor (property) and therefore not subject to the restrictive Direct Tax Clauses. (However, the Social Security tax on the employEE is based on a completely different rationale, which is related to Knapp's and Keynes's state theory of money.)

    • avatar Martin Brock says:

      However, the Social Security tax on the employEE is based on a completely different rationale, ...

      I'm shocked to discover that central authorities construct legalistic rationales for imposing their political preferences.

  3. avatar RickDiMare says:

    CORRECTION:
    "So, maybe there should be a fourth logical reason to tax corporations, at least on their paid-out wages:..."

  4. avatar RickDiMare says:

    Hopefully, I'm not overstaying my welcome here, but I'd like to briefly mention another thing that bothers me about not taxing corporations.

    That is, it's akin to expecting insurance or indemnification without a responsibility to owe premiums. The idea that corporations should not be taxed, or be taxed minimally, seems to go against common sense. If a sovereign extends a corporate charter to certain human beings, then limits their liability (among many other benefits), it should be a significant source of gov't revenue to take a fair piece of the corporation's profits, depending on how well the corporation does while being protected by gov't forces.

    The creation of corporations, if I recall correctly, were instrumental when monarchies, popes, etc. wanted to expand their global influence and attract private capital at the same time. (What investor/shareholder would sponsor a ship if he'd be personally liable for the actions of the ship's captain, the crew, if the ship never returned, etc.?)

  5. avatar Martin Brock says:

    I oppose corporate income taxes for the reasons you give. I oppose these taxes primarily for reasons of transparency; however, levying taxes only on individuals does not solve the problem of rent seekers imposing costs on rent payers. Seeking entitlement to revenue from taxes imposed on others is only one form of this problem. Gaming corporate governance, to shift the costs of taxation onto one corporate factor or another (shareholders, employees near the bottom of the hierarchy or whatever), is another form. With the state sector directly controlling 40% of GDP (and more indirectly), no individual can possibly understand all of the forms rent seeking takes.

  6. avatar Floccina says:

    Another reason to tax corporations is to favor partnerships whose owners are liable for all their debts on dissolution. I think that Corporate tax should be eliminated but perhaps they should have to buy some sort of insurance which would much cheaper than our current corporate tax.

    To tax banks is to tax debt which could be used to discourage debt. I am against it but it is a reason.

    • avatar RickDiMare says:

      That's exactly right, Floccina. You're referring to the "social engineering" nature of excise taxes.

      Bank-created debt SHOULD be taxed to regulate or discourage it, just as the employee portion of the Social Security tax began regulating or discouraging the use of non-coin money (authorized by the 1937 Supreme Court in Helvering v. Davis).

      However, banks have become very powerful and therefore difficult targets of taxation, while government appears to have become addicted to the ease with which taxes on helpless individuals can be collected.

      Also, government seems to have forgotten that both a tax on bank-created debt, as well as the individual's income-tax-regulated use of Knapp/Keynes funny money, are designed to discourage the use of unconstitutional money, with the ultimate goal of incentivizing and encouraging the use of Constitutional coin. (Creating this incentive to use and demand U.S. coin was how the framers would have intended for the U.S. to grow and expand throughout the world. Instead, we've become a nation hell-bent on imbuing the Federal Reserve note with a false sense of value.)

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