Congress: No Tax Break for Foreign Banks

Another piece of evidence to support our thesis that, although the current crisis is not marked by all-out trade wars as in the 1930s, there are still some important and varied aspects of it that are ‘inward facing’.

The latest news is that several members of Congress, who are already trying to do away with a tax break created by Treasury that allows an acquiring bank to write off the tax losses carried by an acquired bank, are expressing their strong opposition to extending ts s benefit to foreign banks:

A group of Democratic representatives from the House Ways and Means Committee wrote a sternly worded letter to Treasury Secretary Henry Paulson warning him against expanding a controversial IRS Notice that allows banks to write off the tax losses of other banks they acquire.

The letter from Lloyd Doggett, D-Texas (pictured), and eight other representatives, cautioned Paulson against expanding the tax guidance to allow foreign banks to also write off the built-in losses of banks they acquire in the U.S.

This is yet another incredible example of economic illiteracy among our elected representatives. In a time when — thanks in no small part to past errors of public policymakers — the financial sector desperately needs willing buyers to shore up struggling institutions and assets, a measure that allows existing tax losses to be written off by an acquirer will have a significant impact in helping the process along. First off, it immediately raises the value of the assets being acquired, thus making such deals more likely to get done. Furthermore, those tax loss assets have the greatest value to the strongest and most profitable operators, thereby helping to reward — rather than punish — effective corporate performance. Second, in today’s world, some of the healthiest financial institutions, who are best positioned to absorb struggling firms and assets, are headquartered abroad. That means that any policy measures which would increase the value of domestic firms to healthy foreign acquirers must be considered. To do otherwise means punishing the private sector of the U.S. economy.

Apparently, there is a group in Congress who believe that tax measures aimed at performing much of the heavy lifting that is required to repair the U.S. financial sector are nothing more than "loopholes" and "backdoor bailouts", and that such measures are even more distasteful when extended to firms that are situated outside the U.S.:

We understand that you may receive requests to expand the scope of your guidance to other sectors; however, we strongly believe that you have already overstepped your authority in issuing the original guidance and urge you not to compound this mistake by further widening this illegal loophole. At a time when we should be working together to identify and limit tax loopholes, not creating – and then expanding them – this backdoor bailout is precisely the wrong approach.

Unbelievable.

This may have nothing to do with the noise and illiteracy that sometimes emanates from D.C. (then again it may), but WebCPA is also reporting that Grant Thornton’s survey of business leader optimism has plunged dramatically since August:

Business optimism among U.S. business leaders has plummeted to its lowest level yet, according to a survey by Grant Thornton.

The firm’s quarterly Business Optimism Index dropped to 35.6 in November 2008 from 57.3 in August 2008. The drastic drop pushed the index almost 20 points beneath the previous low of 54.7, setting a new record since the index’s inception in 2002.

The survey found…57 percent in November feeling pessimistic about their company’s growth over the next six months, compared to 19 percent who expressed pessimism back in August. The proportion who said that they have plans to decrease staffing in the next six months increased from 9 percent to 43 percent.

Only 15 percent now say they plan to increase staff, compared to 37 percent last quarter. Only 44 percent are now optimistic about their own businesses, compared to 81 percent last quarter.

URLs:

http://www.webcpa.com/article.cfm?ARTICLEID=30033 

http://www.webcpa.com/article.cfm?ARTICLEID=30035