Treasury Department Overview on Tax Reform Report

American Banker, November 28, 1984 | Go to article overview

Treasury Department Overview on Tax Reform Report


Most types of financial institutions presently benefit from preferential tax treatment. Besides being unfair and distortionary relative to the taxation of the rest of the economy, these tax preferences create distortions within the financial sector that are inconsistent with the administration's efforts to deregulate financial markets. Equity and neutrality demand that all financial institutions be taxed uniformly on all of their net income. These special preferences are especially inappropriate in a world in which the corporate tax rate is lowered and both individuals and other corporations are taxed on their economic income.

Banks and thrift institutions are allowed to deduct an arbitrary fraction of outstanding loans or otherwise taxable income as an addition to a reserve against bad debts, without regard to the actual losses they experience on bad debts. In theory, reserve accounting is consistent with accrual accounting, but in practice, reserve accounting for banks and thrift institutions has borne little relation to expected losses, and therefore little relation to proper accrual accounting. The special bad debt deduction for thrift institutions is tied to specialization in residential mortgage lending, and only benefits profitable thrift institutions. The special rules are at variance with the general rules that are applied to nondepository institutions and the correct income measurement rule. This arbitrary deduction involves a tax subsidy for financial institutions that has no place in an income tax system; it should be repealed.

Taxpayers generally are prohibited from deducting interest on debt incurred to finance holding of tax exempt bonds. Banks benefit from an exception to this rule; they are able to deduct 80% of interest incurred to carry tax exempt securities, and thus offset taxable income from other soucres, in many cases totally eliminating income tax liability. Because of the special rule that allows banks to earn arbitrage profits, borrowing costs of state and local governments are subject to greater volatility because of the excessive demand created for their taxpreferred bonds. The Treasury Department proposed extending to banks the general rule that fully disallows interest deduction on debt incurred to carry tax exempt securities.

Credit unions, which compete with banks and thrift institutions, curently are tax exempt. This exemption allows deferral of tax on members' interest income that is retained in the credit union. This tax break for their members gives credit unions a competitive advantage in attracting deposits from other financial institutions. The exemption should be repealed.

Life insurance companies traditionally have been allowed a deduction for increases in policy reserves that exceed the amount of policyholder's savings and interest income represented by the actual increase in the cash value of the policies they underwrite. In addition, they are allowed a special deduction for 20% of otherwise taxable income (60% for small companies). This extra deduction is equivalent to applying a lower tax rate to the income fo life insurance companies. Deductions for increases in reserves should be limited to increases in cash value, and the special deduction should be repealed.

Amounts earned by policyholders on the cash value of life insurance (the "inside buildup') generally escape income tax under present law. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Treasury Department Overview on Tax Reform Report
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.