The Radical Plan to Force the Biggest Banks to Pay the Government $86 Billion

A recent proposal to overhaul the tax code in the United States could result in the biggest banks like Bank of America shelling out billions more to the U.S. Government each and every year.

Mar 8, 2014 at 3:00PM

Hate your taxes? Hate the banks? One proposal is seeking to revolutionize both.

Many have taken issue with the taxes -- or lack thereof -- paid by companies in recent years, yet a plan announced last week by Congress is proposing major a change in what the biggest financial institutions will pay. This could have dramatic impacts to firms including Bank of America (NYSE:BAC)AIG (NYSE:AIG)Citigroup (NYSE:C)Wells Fargo (NYSE:WFC), and JPMorgan Chase (NYSE:JPM).

Capitol

Chairman of the Ways and Means Committee, Dave Camp (R-Mich.), revealed his plan "to fix America's broken tax code by lowering tax rates while making the code simpler and fairer for families and job creators," in the Tax Reform Act of 2014, which proposes to simplify the tax code and reduce the burden face by individuals as a result of the current tax system.

The 979 page legislation is full of changes aimed to result in more growth for the United States economy, more jobs available to Americans, and ultimately more money back into the pockets of millions. 

The plan also introduces an additional tax on the biggest financial institutions.

By Leader Nancy Pelosi

President Obama signing Dodd-Frank.
Source: Flickr / Leader Nancy Pelosi.

The extension of Dodd-Frank
The Dodd-Frank act was passed in the wake of the financial crisis and brought change across the broader banking landscape. It also included the designation of the Systemically Important Financial Institution, (SIFI).

Yet the Tax Reform Act of 2014 takes issue with the provision of the SIFI designation and highlights this implicit government guaranty results in the biggest banks paying lower costs to borrower money. The proposal notes it "cannot undo Dodd-Frank," but it does seek to "ensure that Wall Street reimburses the American taxpayer for a portion of the subsidy it receives." 

The plan aims to introduce an additional tax which would require any financial institution with more than $500 billion in assets to pay a 0.035% tax on every dollar of their assets above $500 billion. In addition, it seeks to provide greater transparency across the variety of transactions banks are involved in.

What it would mean
While 0.035% doesn't sound like a lot, it is important to remember that is the quarterly suggested rate. That would mean a total tax of 0.14% of assets above $500 billion for the full year. And when you consider JPMorgan Chase has $2.4 trillion in assets that means it could expect an astounding $2.7 billion in additional tax payments. Bank of America would be next on the list with $2.3 billion in additional taxes:

Images
Source: Federal Reserve.
 

In total, the four largest banks would shell out $8.3 billion back to the Federal Government in the form of additional taxes, which would ultimately be taken straight out of the net income which is available to shareholders:

Images
Source: Company Investor Relations.

In total, the Joint Committee on Taxation anticipates the new taxes would result in $86.4 billion paid to the government as a result of this tax from 2015 to 2023.

The bottom line
The Tax Reform Act of 2014 poses a number of notable initiatives and it is estimated it could result in 1.8 million new private sector jobs, grow GDP by as much as $3.4 trillion -- 20% of current levels -- and result in the average middle class family seeing $1,300 back in their pockets as a result of lower tax rates and economic growth. Those are all undeniably good things.

Yet one has to have some level of concern surrounding what higher taxes at banks could mean for the economy. They could attempt to overcome the impact by charging higher rates on loans to consumers, increasing fees, turning away depositors, or perhaps even expanding efforts to shelter themselves through off-balance sheet assets like derivatives.

The biggest banks have faced an appropriate amount of scorn for their roles in the financial crisis, but they are also one of the engines for economic growth and development in America. While that doesn't excuse prior actions, one has to wonder if the pendulum has now swung too far in the other direction, which could have an equally disastrous result.

Taking advantage of the banking revolution
From taxes, to regulation, to technology, changes are sweeping across financial services. And all too many customers are dissatisfied with the biggest banks. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. For the name and details on this company, click here to access our new special free report.

Patrick Morris owns shares of American International Group and Bank of America. The Motley Fool recommends American International Group, Bank of America, and Wells Fargo. The Motley Fool owns shares of American International Group, Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo and has the following options: long January 2016 $30 calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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