Tennessee is one of nine states that does not have an income tax.
Anti-tax advocates want to make sure it stays that way. Next week, Tennessee voters will be asked whether the state constitution should be amended to forever prohibit income and payroll taxes.
“Not having an income tax has already brought jobs to Tennessee, and voting ‘yes’ on [question] 3 will bring even more jobs,” said state Sen. Brian Kelsey, a Republican who sponsored the legislation leading to the amendment.
That’s the common argument made by income tax foes — economic growth more than makes up for the money a state loses in revenue from not having an income tax.
But is that true?
The picture is mixed when comparing states with no income taxes to those with the highest marginal rates.
Some statistics, particularly on job growth, back up tax opponents. And people in those states pay fewer taxes in general. But by other measures, such as household income, states with the highest taxes do better (CRAP).
Eight states in addition to Tennessee do not have an income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington and Wyoming.
Since 2000, those nine states posted stronger median employment growth than the nine states with the highest top marginal income tax rates (California, Hawaii, Iowa, Maine, New Jersey, New York, Oregon, Vermont and Wisconsin), averaging 11.5 percent job growth compared to the latter group’s rate of 2.9 percent, according to the Census Bureau.
A low income tax encourages people and businesses to move to a state, said Jonathan Williams, director of the conservative American Legislative Exchange Council’s Center for State Fiscal Reform.
“The way to increase tax revenue is not to increase the taxes but to increase the number of taxpayers,” Williams said.
States with no income tax have a lower overall tax burden. Residents of high-rate states fork out $4,773 in taxes, over $1,300 more than residents in states without an income tax.
And states with no income tax also tend to be more business-friendly, as five of them have no corporate tax rate. Only Alaska and New Hampshire have corporate tax rates that are comparable to the ones in the high-rate states, running between 7 and 12 percent.
The no-tax states have higher rates of economic growth, too. Their economies grew by 3.3 percent on average since 2005, compared with 2 percent for the high-tax states, according to an August report by the U.S. Bureau of Economic Analysis. The averages are thrown off somewhat by sparsely populated Wyoming growing at 8.4 percent, but some high-population, no-tax states also enjoyed strong growth, such as Texas at 4.3 percent and Florida at 3.7 percent.
States with no income tax must get their revenue from somewhere, though. Sales taxes are one way: They average 4.5 percent, but residents of Tennessee and Nevada pay as much as 7 percent.
“It was 5 percent just a few years ago,” said Dick Williams, chairman of Tennesseans for Fair Taxation. That’s a bad deal for state residents, he argues, since sales taxes fall disproportionately on low-income consumers. “An income tax would grow more in line with people’s needs.”
But sales taxes in no-income-tax states are actually lower than in high-tax states, which charge an average 6 percent — 1.5 points higher.
And living in a state with a high income tax doesn’t mean that other taxes will be lower. In most cases, other tax rates are comparable to or even higher than the ones in states that lack an income tax:
• Gas taxes: People in no-income-tax states pay an average 43.4 cents for every gallon of gas they buy, while high-rate states charge 48.6 cents. The national average is 49 cents.
• Tobacco taxes: No-income-tax states charge $1.46 in taxes for every pack of cigarettes, while smokers pay an extra $2 in high-rate states. The national average is $1.54.
• Property taxes: Counties in no-tax states charge an average 1.1 percent of assessed value, while in high-rate states they charge 1 percent. Most counties nationwide charge between 0.5 percent and 1 percent.
“High income taxes do not necessarily translate into low sales taxes or even property taxes,” said Pete Sepp, president of the National Taxpayers Union, a conservative nonprofit group. “There is a strong correlation in the opposite way, in fact.”
Elizabeth McNichol, senior fellow at the liberal Center for Budget and Policy Priorities, notes that many of the no-income-tax states have special advantages that allow them to get by without one. Nearly a quarter of Nevada’s revenue comes from taxes on gambling, while Alaska earned a staggering 92 percent of its general fund revenue last year solely from taxes and royalties on oil drilling. The coffers overflow so much that the state sends annual royalty checks to residents. The latest checks, mailed earlier this month, were for $1,882.
“Other states [such as Wyoming] have mineral wealth. Texas has a lot of land and room for development,” McNichol said.
Tennessee and New Hampshire may not tax regular income, but they do tax dividend and interest income at 6 percent and 5 percent. The Granite State also has a 7 percent telecommunications tax.
Income taxes don’t seem to matter much in terms of the states’ budget health. “We really didn’t see a difference between the high and low income tax states” during the recession, McNichol said.
Part of the problem is that revenue from income taxes can be volatile, Sepp said, resulting in unexpected shortfalls.
Residents of states with high rates are generally doing better, though. They have an average annual income per capita of $45,480, almost $1,000 higher than residents of the no-income-tax states. Median household income is higher too, at $56,583, about $1,500 more.
“A lot of the high-tax states do have higher incomes but that is partly due to the fact that they have higher costs of living,” said ALEC’s Williams. “We think the gap is shrinking, though.”
Using a law, the Civil Asset Forfeiture Reform Act of 2000, that allows the feds to seize money from suspected gangsters, drug dealers and terrorists, the IRS has put innocent people into bankruptcy and massive debt and taken the money a military father saved from his paychecks to put his kids through college, solely by tracking the amounts that people put into their bank accounts.
When no criminal activity is charged, The New York Times reports, the IRS often negotiates to return only part of the seized money, leaving impoverished citizens with little option but to either accept the IRS’ offer or continue a lengthy and very expensive legal battle to try to get their legitimately earned money back.
The problem has been growing. The Institute for Justice estimates that from just 114 seizures in 2005, the IRS made 639 seizures in 2012, and in only 20 percent of the cases were any criminal charges ever pursued.
Under the Bank Secrecy Act, banks report transactions larger than $10,000 to federal authorities, but also report a pattern of regular, smaller deposits which appear designed to get around the act. This alone can be enough to trigger a seizure, the Times reports, and banks filed over 700,000 “suspicious” reports last year.
One involved a 27-year-old Long Island candy and cigarette distribution company, Bi-County Distributors, which made daily cash deposits, usually under $10,000. When the IRS seized $447,000 from the company, it refused to return it, despite the fact that there was no crime to prosecute, and instead offered a partial settlement.
The company is now $300,000 in debt and attorney Joseph Potashnik told the Times, “I don’t think they’re (the IRS) really interested in anything. They just want the money.”
Army Sgt. Jeff Cortazzo was saving up for his daughters’ college education when the IRS seized $66,000 of his money – it cost him $21,000 to get the remainder back.
Richard Weber, the chief of Criminal Investigation at the IRS, said in a written statement in response to the Times story, “After a thorough review of our structuring cases over the last year… IRS-CI will no longer pursue the seizure and forfeiture of funds associated solely with ‘legal source’ structuring cases unless there are exceptional circumstances justifying the seizure and forfeiture and the case has been approved at the director of field operations (D.F.O.) level.”
The Federal Reserve is NOT Federal and has no reserves! New Fed Chair Janet Yellen has already made statements about you putting your money into savings accounts…. They don’t want you to. They punish those who wont listen. – JB
I found her speech to be disingenuous and disturbing. Why? Because it is the Fed’s very own policies that are driving the expansion of the wealth gap. Read Yellen’s speech.
Either Yellen thinks we cannot be trusted with the truth (worrisome), or the Fed is clueless as to how its own policies operate (scarier).
The academic name for the Fed’s current policy is financial repression. But a more apt name would be “Throw granny under the bus,” because the program boils down to taking from savers and fixed-income recipients and transferring that purchasing power to other entities.
The cornerstone element of financial repression is negative real interest rates, of which the Federal Reserve is the prime architect and owner.
From the start of the Fed’s post-crisis intervention through 2013, the total cost of these negative real interest rates was over $750 billion just to savers alone. The loss of income to fixed-income investments (such as bonds held in pensions and money markets) was even larger.
It’s actually more appropriate to ask if the Federal Reserve is compatible with values rooted in our nation’s history.
But here’s the rub. That loss of income and purchasing power didn’t just vanish. It was transferred from pocket A to pocket B.
It magically appeared again in record Wall Street banking bonuses, in shrinking government deficits (due to lower than normal interest rates), in rising corporate profits (mainly benefiting the already rich), in record stock buybacks (ditto), and in rising wealth inequality.
More directly, when the Fed buys financial assets with printed money and — by definition — drives up the price of those assets, it cannot then act mystified why the main owners of financial assets have grown wealthier. Doing so simply insults our intelligence.
With that as background, I found myself struggling to remain calm as I read Yellen’s recent remarks.
Yellen has created the wealth gap by printing money
Why Fed Chair Janet Yellen is “greatly” concerned about growing inequality
Federal Reserve Chair Janet Yellen on Friday expressed deep concern over widening economic inequality in the country and called for tackling issues such as early childhood education and encouraging entrepreneurship to help narrow the gap.
Comment: Did she really just deflect the consequences of the Fed’s policy of financial repression towards early childhood education? That’s like a burglar lecturing homeowners that they need to support better metallurgical research as the means of preventing their doors from being kicked in so easily in the future.
In a speech at the Federal Reserve Bank of Boston, Yellen said steady growth in inequality over the past several decades represents the most sustained rise since the 19th century. Living standards for most Americans have been “stagnant,” while those at the very top have enjoyed significant wealth and income gains, she said.
Comment: Glad the Fed finally noticed that those at the very top have been making out like bandits! This was something I said explicitly would happen as a consequence of future Fed printing back in 2008, before any QE had even started. How is it that I predicted that this would happen back in 2008 and the Fed is just now noticing? Is my one-man research department more capable than the entirety of the Fed’s? In fact this is a very well known and easy to understand process. That the Fed is feigning ignorance speaks volumes about how ignorant they believe we all are. This is a sure sign that we are trapped in a dysfunctional relationship with an abusive partner.
“I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity,” Yellen said.
Comment: Once we accept that the Fed is openly and specifically creating the wealth gap as a matter of active and ongoing policy, which it is, then it’s actually more appropriate to ask if the Federal Reserve is compatible with values rooted in our nation’s history. The answer, if you believe in a level economic playing field, is “no.”
Yellen listed four factors that can influence economic opportunity: investing in education for young children, making college more affordable, encouraging entrepreneurship and building inheritance.
Comment: OMG. She just blamed the victims. According to Yellen, if people are finding themselves getting poorer what they need to do is stop scrimping on their kids, become an entrepreneur and go back in time and have rich parents somehow. This statement of hers calls for pitchforks and torches. Without a shred of decency, she has shifted all blame from the Fed to the victims. How corrupt or morally adrift does someone have to be to blame the victim? In a criminal case this would be used as evidence of sociopathic if not psychopathic behavior and be used by a prosecutor to call for a maximum sentence.
Yellen did not address in her prepared text whether the Fed has contributed to inequality.
Comment: No surprise there. Those who blame victims always avoid looking in the mirror.
At this point, based on Yellen’s testimony, I think it’s time to say what everybody is already thinking: if the Fed were an individual, we’d call its behavior pathological. Psychopaths blame their victims.
In a more evolved society than ours, Yellen would have been immediately booted from the stage, and the president would already be asking for her resignation. Sadly, she remains safely in charge, and utterly tone deaf.
We don’t need more lectures from her on our perceived failures to spend enough on our kids, have enough entrepreneurial talent, or have rich parents. What we need is a return to the level playing field that originally made this country great.
Chris Martenson is is an economic researcher and futurist specializing in energy and resource depletion, and co-founder of PeakProsperity.com.
Silicon Valley venture capitalist Peter Thiel told CNBC on Monday that we are in a “government bubble of massive size,” and that the bond market is the most distorted of all the markets. (see metals too..)
In a wide-ranging interview on CNBC’s “Squawk on the Street,” Thiel also spoke about tech investing, the PayPal-eBay split, Alibaba, cybersecurity and Elon Musk.
“I think the thing that is most distorted is the bond market and fixed income, and perhaps less on the equity side, but we certainly are back on a government bubble of massive size,” he said.
Tech stocks are quite a different story, he added.
“They’re somewhat overvalued but that’s not the core of the insanity,” he said. “Tech investors always overrate growth and always underrate durability. You can measure growth but you can’t measure durability.”
A new report of “economic freedom” around the world finds the US ranked 12th among 152 countries, tied with the United Kingdom, and lower than neighbor Canada or Australia. The index, published by the Cato Institute and Canada’s Fraser Institute, has been published since 1996. As recently as 2000, the US ranked 2nd in the world, in terms of boasting a free economy. The US’s declining ranking will lower future economic growth.
The index, built on decades of research by Nobel laureates and dozens of leading scholars, measures 5 broad factors that impact the economy: 1. Size of government; 2. Legal structure and security of property rights; 3. Access to sound money; 4. Freedom to trade internationally and; 5. Regulation of Credit, Labor and Business. Countries where citizens are freer to engage in business and trade and property and legal rights are protected by the rule of law will score higher on the index. According to economic research, though, these countries will also do better economically and create and generate more wealth.
The 10 freest economies in the world are: Hong Kong, Singapore, New Zealand, Switzerland, Mauritius, United Arab Emirates, Canada, Australia, Jordan, and Chile and Finland tied for 10th.
America’s descent down the ladder of economic freedom is unsettling, in itself. More troubling, however, is the chief factor behind the US decline. The biggest drop in US economic freedom has been in the country’s legal structure. The report notes that, “increased use of eminent domain to transfer property to powerful political interests, the ramifications of the wars on terrorism and drugs, and the violation of the property rights of bondholders in the auto-bailout case have weakened the tradition of strong adherence to the rule of law in United States.”
The rule of law has long been the foundation of America’s economic prosperity and liberty. The US ranking in this area has plummeted to a terrible 36th place in the world. This, combined with increased regulation is stifling US economic growth. The report observes, “[t]o a large degree, the United States has experienced a significant move away from rule of law and toward a highly regulated, politicized, and heavily policed state.”
The report estimates the cost of the decline of economic freedom in the US. On current trends, future economic growth will be half the historic average of a 3% yearly gain. The past few years have schooled us on the impact low growth has on the labor market and economic outlook.
This latest report is a sobering look at the scale of challenges facing the US. Curtailing government’s leviathan isn’t simply solving a math problem, i.e. getting revenue and spending figures for government to balance. A far larger threat is the accumulation of thousands of rules and regulations that not only stifle innovation but also undermine our personal and property rights.
A balanced federal budget is insignificant and meaningless if the rule of law has been subverted. No single election or administration can repair that damage. That is a task that must be tackled by a generation.
Slap in the face? Maybe… However we still believe that “tax credits” are a joke of extortion, and a Protection racket extending straight to the Federal Reserve. How many major corporations will get to keep their “Pre-funds” while the rest are chased and potentially jailed?
Actual Solutions for US healthcare NEVER get considered without paying off Corps O’merica their cuts!
A significant benefit of the Affordable Care Act is the opportunity to receive money-saving tax credits up front to cut the overall cost of health insurance, but now hundreds of thousands of consumers could owe back some of that money next April.
Those affected took advance payments of the premium tax credit for health insurance. Some married couples could owe $600 or $1,500 or $2,500 or even more. It might feel like a raw deal for some who are already suffocating under the escalating costs of health insurance.
“Health insurance is confusing enough, and now they’re adding the complexities of the Tax Code,” said Lorena Bencsik, a member of the Michigan Association of CPAs and owner of Prime Numbers in Ferndale.
When you file that 2014 tax return next year, the Internal Revenue Service will compare your actual income for the year with the amount you estimated when applying for exchange-based health insurance under the health insurance law.
The next open enrollment period begins Nov. 15. But notices were sent this week to some consumers whose incomes don’t match up to such things as 2012 tax return information.
On Monday, the Centers for Medicare and Medicaid Services said at least 279,000 households reported incomes that still don’t match what the government has on record. Supporting documents are needed by Sept. 30.
What can you do to avoid tax-time problems?
Experts say people need to realize early on that they should report changes in income and other changes in one’s life, such as a marriage, throughout the year. See HealthCare.gov to report “income and life changes.”
Of course, many people may have no idea that they’d need to report changes.
What should you report? A move, an increase or decrease in income, a marriage or divorce, the birth or adoption of a child, whether you started a job that offers health insurance and whether you gained or lost eligibility for other health care coverage.
Best spots for information: HealthCare.gov and IRS.gov/aca.
Karen Pollitz, senior fellow with the Kaiser Family Foundation, said many people who qualify for these tax credits aren’t working 9-to-5 jobs with regular salaries. So guesstimating one’s income for the coming year can be very tough.
“It’s people in transition. Maybe they’re in and out of work,” she said. Or maybe they’re self-employed.
People who lose a job would want to report that change during the year, as well, because that change can lead to a higher advance payment for the credit.
“Life changes can drive tax changes,” said Mark Steber, chief tax officer for Jackson Hewitt Tax Service.
Steber stressed that people need to make sure to update information via HealthCare.gov or their state insurance exchanges.
The Kaiser Family Foundation site has a calculator to help figure out potential tax credits, based on one’s situation.
Premium tax credits are available to individuals and families with incomes between 100% of the federal poverty line ($23,550 for a family of four this year) and 400% of the federal poverty line ($94,200 for a family of four) who purchase coverage in the health insurance marketplace in their state.
The tax credits are paid directly to the insurer, if taken in advance. People are not required to take the entire credit in advance. Realistically, if you cannot afford insurance, you’d need some credit in advance.
To be sure, there are some caps on the amount filers must pay back and the cap is based on household income. The cap ranges from $300 to $1,250 for some single taxpayers and $600 to $2,500 for married taxpayers, again based on income.
But if the income is 400% or more above the poverty line, there is no cap and the taxpayer must pay back the full amount.
Rules exist for qualifying for the premium tax credit: You must buy health insurance through the marketplace; you’re not eligible for coverage through an employer or government plan; your income must be within certain limits; you do not file a married-filing-separately federal tax return (unless you meet certain exceptions, such as victims of domestic abuse and spousal abandonment) and you cannot be claimed as a dependent by another person.
The actual credit would vary based on how close your are to the federal poverty level, your age, the size of your family and where you live.
Sadly, it’s fair to say some people will see some unexpected, unpleasant surprises on their tax returns next year.
Here is just another piece of evidence showing who owns the country–the Elite “Global Money Paradigm”.
From the local Aspen Daily News out of Colorado we read,
Vice President Joe Biden is in town through this evening for an event sponsored by the private equity firm Forstmann Little & Co. (see below)
The invite-only gathering is an annual autumn affair in Aspen, and typically attracts big names from the worlds of politics, business and entertainment for off-the-record discussions. A sitting vice president would be one of the bigger gets in recent memory.
Biden’s 40-car motorcade sped to Aspen after landing at the Eagle County Regional Airport, arriving in town around 8:30 p.m. Law enforcement personnel escorting the motorcade blocked every intersection as the caravan passed along the 70-mile route using Interstate 70 and Highway 82. The operation, which a Pitkin County sheriff’s deputy said went smoothly, will be repeated in reverse this evening when Biden leaves town.
“I’ve never got here that fast from Vail before,” said a local who was hired to drive one of the cars and asked not to be identified because they are not authorized to speak to the press.
The area around the St. Regis hotel was crawling with Secret Service agents, local cops and private security shortly after the vice president’s arrival. Around 9:45 p.m., a second motorcade left the St. Regis for the Hotel Jerome.
Biden is said to be participating in a discussion with noted interviewer Charlie Rose today.
In case you are thinking that we need a few “sunshine laws” to put these “off the record” discussions on the record, here’s an indication that “the most transparent Administration in history” would rather keep things in the dark.
According to Biden’s public schedule at the www.whitehouse.gov website, Biden held a roundtable discussion on domestic violence in Denver at 3:30 p.m. on Friday. His schedule listed no public events through the rest of the weekend.
Well, I guess, since this is a private group with private access to a Vice-President it is none of the public’s business.
That’s quite a government we’ve got.
Forstmann, Little & Company is a private equity firm, specializing in leveraged buyouts (LBOs). At its peak in the late 1990s, Forstmann Little was among the largest private equity firms globally
Ted Forstmann (Yale University) was a golfing partner of Derald Ruttenberg at the Deepdale Country Club on Long Island. He arranged for Ruttenberg to meet Henry Kravis and Jerry Kohlberg of the start-up Kohlberg Kravis Roberts. Kravis and Kohlberg proposed what they called a leveraged buyout. After the two had left, Ruttenberg suggested that Forstmann could do the same himself.
Successful acquisitions include Gulfstream Aerospace, Topps Playing Cards, Dr Pepper, Stanadyne Inc., and General Instrument. The company has usually been successful in making a profit on such purchases, selling Gulfstream to General Dynamics, and General Instrument to Motorola.
One prominent episode in the life of the company was the 1988 bidding war for RJR Nabisco. Forstmann Little offered to acquire RJR Nabisco, but the management (chiefly F. Ross Johnson) instead chose Shearson Lehman Hutton. In the end, the board of directors chose Forstmann Little’s arch-rival, Kohlberg Kravis Roberts & Co.. The episode was popularized in the book Barbarians at the Gate: The Fall of RJR Nabisco.
Other headline transactions the firm participated in include Revlon (1985), which resulted in the so-called Revlon Duty, and Citadel Broadcasting, of which Forstmann Little owns 27%, following a merger with ABC Radio in 2006. In 2004, Forstmann Little acquired IMG in a $750 million deal, and in 2005 bought 24 Hour Fitness for $1.6 billion.
In December 2006, newspaper reports on the inquiry into the death of Diana, Princess of Wales alleged that U.S. intelligence agencies had bugged Forstmann’s phone or plane and monitored his relationship with Diana. She and her sons were said to have planned to visit him in summer 1997, but British security reportedly blocked the visit over security concerns related to the bugging.
All of the founder have recently died (cancer) and it appears that KKR is running FL and co as a shell corp.
House Republican leaders scheduled a vote on the legislation for sometime this week, as one of a series of pre-election bills designed to highlight lawmakers’ stances just before they go home to face voters.
Mr. Paul made the bill one of his causes, and after years of trying finally pushed it through the House in 2012 on an overwhelming 327-98 vote. But Senate Majority Leader Harry Reid, who had previously said he supported an audit of the Federal Reserve, reversed himself.
“If Harry Reid refuses to hold the vote before the Senate leaves town, you can help us make sure the American people hear about it all the way until Election Day and build so much pressure by the time Congress returns, the Senate will be forced to act in the Lame Duck,” Mr. Paul said in an email to supporters from his advocacy group, Campaign for Liberty.
Mr. Paul retired from the House after the last Congress. The current House version of the legislation is sponsored by Rep. Paul Broun, a Georgia Republican. His version cleared the House oversight committee on a voice vote in July, suggesting continued bipartisansupport.
The bill would order the Government Accountability Office, which is Congress’s chief investigative arm, to review the Fed’s decision-making — particularly on monetary policy.
Congress established the Federal Reserve nearly a century ago. The system, which consists of a board of governors and 12 regional banks, act as lenders of last resort to the country’s banking system, and it is charged both with fighting inflation and with promoting economic growth and employment.
The Congressional Budget Office said the bill would cost about $5 million for the staff required to conduct the audit. The CBO also said the Federal Reserve would spend money complying with the review, which would end up costing the government about $3 million in lower revenue from the Fed over the next decade.
The previous chairman of the Federal Reserve, Ben Bernanke, had opposed an audit, saying it could lead to politicians second-guessing the secretive board’s decisions. When Mr. Paul’s bill came up for a vote in 2012, Mr. Bernanke called it a “nightmare scenario.”
Mr. Paul’s son, Sen. Rand Paul, Kentucky Republican, has a companion bill in the Senate, but that has not seen any action with Democrats controlling the chamber.
Despite Democratic leaders’ opposition, a number of rank-and-file Democrats support the legislation.
Indeed, 19 Democrats in the House are co-sponsors of Mr. Broun’s bill, while in the Senate, Sen. Mark Begich, Alaska Democrat, is a co-sponsor. Mr. Begich even bragged about his support for the legislation in a recent Senatecampaign debate.
Banks are lending to companies and individuals at the fastest pace since the financial crisis, helping propel profits to near-record levels.
U.S. banks posted $40.24 billion in net income during the second quarter, the industry’s second-highest profit total in at least 23 years, according to data from research firm SNL Financial. The latest profits are just below the record $40.36 billion recorded in the first quarter of 2013.
Banks are lending to companies and individuals at the fastest pace since the financial crisis, helping propel profits to near-record levels. Saabira Chaudhuri joins MoneyBeat with Paul Vigna. Photo: Getty Images.
The rebound comes even as bank executives say rising costs of regulation are hurting their businesses.
Banks set aside less money to cover soured loans, helping to boost profits. At the same time, overall loan growth increased at its fastest quarterly pace since the financial crisis, topping $8 trillion in total loans outstanding for the first time since SNL began tracking the data in 1991.
Commercial lending rose at an annualized 12.6% rate in the second quarter.
Growth in consumer lending, particularly student lending, auto loans and credit cards, also has picked up, to about 6% from 3% a year ago.
On the heels of the financial crisis, some lawmakers, regulators and consumers complained that banks weren’t lending enough. But steady improvement in credit quality, or borrowers’ ability to repay loans, is prompting banks not only to lend more but also to ease their standards.
The improving picture reflects a healing of the U.S. economy five years after the official end of the recession that began in late 2007. White House officials on Friday said the U.S. labor market is about 80% back to precrisis levels.
“Everyone is delighted to see a resurgence of bank earnings that is consistent with the economic recovery nationwide,” said John Kanas, an industry veteran who is now chief executive officer of BankUnited Inc., a lender based in Miami Lakes, Fla.
So far, the results haven’t impressed investors, who remain concerned about a range of headwinds facing the industry, from growing regulatory costs and stubbornly low interest rates to steep slowdowns in mortgage lending and securities-trading revenue. Such issues have weighed on other measures of bank health, such as the returns lenders generate on their equity.
The KBW Bank Index, which tracks the stocks of 24 banks, is down 0.9% so far this year, compared with a 4.8% rise for the S&P 500 index.
Still, it has taken years for the nation’s banks to get back on track since getting pummeled in the financial crisis by soured loans and bad investments.
“The second quarter was an inflection point in the profitability story for banks,” said SunTrust analyst Eric Wasserstrom. “The bad is starting to bottom out, the good is starting to gain momentum.”
In part, the recovery has been slow because the depth and breadth of the financial crisis took many bank executives by surprise, coming after years of bumper profits driven by the housing boom and low default rates on loans. Banks earned $40.21 billion in the last three months of 2006, the industry’s third-most-profitable quarter, as mortgage lending surged. Figures from SNL, which is based in Charlottesville, Va., aren’t adjusted for inflation.
This time, the growth is being driven primarily by business loans.
“It’s definitely a lot easier [to get a loan]. There is no question about it,” said Randy McCullough, chief executive of Charles & Colvard Ltd, a jewelry company based in Morrisville, N.C. The company recently closed on a three-year, $10 million credit facility with Wells FargoWFC -0.12% & Co.
Banks’ willingness to lend has also been good news for STW Resources Holding Corp., a water-reclamation and oil-field-services company that recently received a $3.5 million line of credit.
“Credit lines are opening up nicely in the form of equipment and project finance,” said Paul DiFrancesco, the head of finance and business development for the Midland, Texas, company. Mr. DiFrancesco declined to name the bank that granted the credit.
Regional banks reported the strongest growth in commercial and industrial lending during the second quarter. Cleveland-based KeyCorp, for example, posted a 13.4% increase in commercial, financial and agricultural loans from the year-earlier period, to $26.4 billion, helping to drive a 5.5% gain in loans overall.
The higher loan levels come as banks are easing up on their underwriting standards to borrowers. A Federal Reserve survey of senior loan officers released last week found that lenders were loosening standards and loan terms for commercial and industrial loans and commercial real-estate loans.
Several large banks had said they had eased standards, raised credit limits and reduced the minimum required credit score for credit-card loans, according to the survey.
Banks also saw their second-quarter profits lifted by a reduction in the amount of money they set aside to cover future bad loans. So-called provision expenses fell to $6.59 billion in the second quarter from $7.61 billion in the first quarter and $8.53 billion in the second quarter of 2013.
Big banks are still releasing some of those reserves, an action that pumps up profits. The four largest U.S. banks—J.P. Morgan Chase, Citigroup, Bank of America Corp.BAC -0.17% and Wells Fargo—released a total of $2.25 billion of reserves in the second quarter, up about 20% from the first quarter.
The improving profit picture isn’t trickling down to bank investors, however, because analysts and investors remain concerned about the long list of obstacles facing the industry.
One important measure of bank profitability is return on equity, or the amount of profit a bank generates as a percentage of shareholders’ equity.
RBC Capital Markets analyst Gerard Cassidy notes that the 20 largest banks he covers reported a median return on equity of 9.3% in the second quarter, up from 8.4% in the first quarter. But a return on equity below 10% “is one of the biggest obstacles to higher stock valuations,” he said.
U.S. jobs pay an average 23% less today than they did before the 2008 recession, according to a new report released on Monday by the United States Conference of Mayors.
In total, the report found $93 billion in lost wages.
Jobs lost during the recession paid an average $61,637. As of 2014, jobs in the same sectors paid an average of $47,171 annually.
“Under a similar analysis conducted by the Conference of Mayors during the 2001-2002 recession, the wage gap was only 12% compared to the current 23%–meaning the wage gap has nearly doubled from one recession to the next,” stated the Conference of Mayors in a statement.
The report also found that 73% of metro area households earn salaries of less than $35,000 a year.
President Barack Obama, who is on a two-week vacation at Martha’s Vineyard, has yet to comment on the dour economic findings.
President Barack Obama says U.S. corporations that adopt foreign addresses to avoid taxes are unpatriotic. His own administration helped one $20 billion American company do just that.
As part of the bailout of the auto industry in 2009, Obama’s Treasury Department authorized spending $1.7 billion of government funds to get a bankrupt Michigan parts-maker back on its feet — as a British company. While executives continue to run Delphi Automotive Plc from a Detroit suburb, the paper headquarters in England potentially reduces the company’s U.S. tax bill by as much as $110 million a year.
The Obama administration’s role in aiding Delphi’s escape from the U.S. tax system may complicate the president’s new campaign against corporate expatriation. After a wave of companies announced plans to shift addresses this year, Obama last month labeled the firms “corporate deserters.”
The Delphi case also highlights how little attention the administration paid to the tax avoidance technique until recently. Only this year did Obama include a measure in his annual budget proposal to prevent some tax-driven address changes, which are known as “inversions.” Thanks to gaps in a Congressional ban on contracts with inverted companies, his administration continues to award more than $1 billion annually in government business to more than a dozen corporate expats.
The Obama administration is now trying to rescind the tax benefits of the Delphi deal that it helped broker. In June, the Internal Revenue Service told Delphi that the 2009 address change should be disregarded for tax purposes, and that Delphi must pay taxes as a U.S. company. Delphi says in a securities filing that it will “vigorously contest” the IRS’s demand.
“The recent rise in inversion transactions has the IRS and Treasury and the president understandably rattled, so they’re now trying to play catch up,” said Julie Roin, a tax professor at University of Chicago Law School. “They were worried about other things in 2009.”
U.S. companies have been inverting for decades. The pace of departures began to quicken about two years ago, as a series of drugmakers sought to become Irish. The issue caught the attention of lawmakers and the Obama administration this year. The companies are trying to escape the country’s 35 percent corporate income tax rate,the highest in the developed world.
With some of the country’s biggest companies, including Deerfield, Illinois-based Walgreen Co. and New York-based Pfizer Inc., having considered such plans, legislators are increasingly concerned that the U.S. corporate income tax base will dwindle. One Congressional estimate puts the cost of inaction at $19.5 billion in forgone revenue over the next decade.
The Treasury Department said yesterday that it is examining options for curbing inversions that wouldn’t require Congress to act. Such changes could limit inverted companies’ ability to claim interest deductions that reduce their U.S. taxable income.
To be sure, the administration’s goal in helping Delphi in 2009 was to prop up its main customer, Detroit-based General Motors Co. — not the corporate tax base. The Treasury Department said at the time that it wouldn’t micro-manage GM or force changes for government policy reasons, although it did intervene in the politically sensitive area of executive pay.
Adam Hodge, a Treasury Department spokesman, said the department’s work with Delphi was limited to providing funding through GM in order to shore up a crucial supplier for the automaker.
Saving Car Industry
“We weren’t involved in that decision regarding the tax implications in their emergence from bankruptcy,” he said, adding that he got his information from the former Treasury officials who worked on the bailout. “We were focused on trying to save the auto industry.” He declined to answer specific questions, citing the pending IRS dispute.Timothy Geithner, the Treasury secretary during Obama’s first term, also declined to comment.
Claudia Tapia, a Delphi spokeswoman, declined to comment on the IRS dispute or the government’s role in Delphi’s address change. The company’s shares have more than tripled since a 2011 initial public offering.
“Delphi was on its deathbed. They had to do something to keep the company from being liquidated,” Roin said. The favorable tax treatment may have helped save Delphi, she said.
Delphi’s official home base is now an hour’s train ride east of London, at a plant and research compound in the county of Kent. Inside windowless gray factory walls, workers in navy blue uniforms make pumps for diesel engines. Employees there said last week that top executives rarely visit.
These days, most U.S. companies trying to escape the domestic tax system do so by buying a smaller company abroad and adopting its address. Delphi took a different route, through a courtroom in Manhattan.
The journey began in 1999, when GM, the largest U.S. automaker, spun off some of its parts-making operation as an independent company. The plan was to separate Delphi so that it could thrive on its own, supplying not just GM but rivals around the world.
That didn’t work out so well. Saddled with legacy obligations to union workers, Delphi filed for bankruptcy protection in federal court in 2005. By 2009, with the nation in recession and GM itself tottering, Delphi was still limping along in bankruptcy, sustained by occasional cash infusions from GM.
Facing the worst car market in decades, GM and Auburn Hills, Michigan-based Chrysler were themselves running out of cash. Some officials said they feared an economic catastrophe if the automakers were forced to liquidate and put hundreds of thousands out of work.
In December 2008, the outgoing Bush administration approved $17.4 billion in rescue loans for GM and Chrysler. In February, Obama assembled a task force led by Steven Rattner, a Wall Street financier, to oversee the bailout.
The Treasury task force had broad authority at the automakers, because the terms of the government loans propping them up gave it veto power over major decisions.
One of the team’s first jobs was to fix Delphi. GM still depended on its former subsidiary for crucial parts like steering assemblies. A liquidation of the supplier could end up shutting down many of GM’s assembly lines, too. But the team members didn’t want GM to dump money into Delphi indefinitely. In March, the night before GM was slated to get court approval to hand over another $150 million to Delphi, the task force rejected the plan.Delphi would get no more cash from GM unless it was part of an exit from bankruptcy.
Negotiations ensued between Rattner’s task force, GM, Delphi’s executives, and its creditors.
By June 1, the task force found a solution it could endorse: the bulk of Delphi’s assets would be sold to Platinum Equity LLC, a Los Angeles-based private-equity firm. GM would provide most of the financing, and then separately would buy Delphi’s steering unit and four U.S. factories.
In his 2010 book about the bailout, “Overhaul,” Rattner credits his team with sealing the Platinum deal, working through sleepless nights to “put the parts company onto a glide path toward successful resolution.”
He doesn’t mention one detail of the transaction that was disclosed three weeks after the Platinum agreement in a public court filing: Platinum was considering registering the new Delphi in tax-friendly Luxembourg rather than in the U.S. The following month, Platinum took steps to carry out the plan, dispatching lawyers to register two Luxembourg entities. Both bore the name Platinum used for its Delphi project: Parnassus, the mountain in Greece where, according to legend, the oracle of Delphi issued her prophecies.
Meanwhile, GM made its own trip through bankruptcy court to shed its debts. On July 10, 2009, it emerged under the formal control of the Treasury Department, which had swapped some of its debt for stock and now held 61 percent of the shares. Rattner stepped down, and his task force began disbanding, handing much of its authority to a reconstituted GM board.
In an interview, Rattner said as far as he can remember, he wasn’t aware of any plan for Delphi to take a foreign address until Bloomberg News asked him about it a few weeks ago. He said others on his team handled the details of the Delphi negotiations, which he said contributed to the industry’s revival.
“The companies are making money. They’re hiring more workers. The whole supplier base, including Delphi, is doing well,” Rattner said. “In 2009, they were about to evaporate from the planet.”
The deal with Platinum soon ran into trouble.
Creditors including Elliott Management, the hedge fund run by New York billionaire Paul E. Singer, said Platinum was buying the company too cheap. So Elliott and another hedge fund, Greenwich, Connecticut-based Silver Point Capital LP, put in their own bid for the company, offering to swap their debt for new shares. On July 26, 2009, they agreed with GM to cut Platinum out of the deal.
In some ways, the Elliott deal was similar to the one Rattner’s task force approved the previous month. GM would provide crucial financing for the new company — a $1.7 billion direct investment in its equity, making it a shareholder alongside the hedge funds. GM would also buy the steering business and other assets for about $1.1 billion.
All this spending would depend on the Treasury Department’s approval. After it emerged from bankruptcy, GM ended up with $16 billion of Treasury Department funds in a special escrow account that could be tapped only with the government’s blessing.
Another detail remained the same as well: GM and the hedge funds agreed to register the new Delphi in Luxembourg or another, mutually agreeable foreign country.
The agreement was “the result of complex and extensive arms-length discussions among Delphi and its various stakeholder groups,” including creditors, GM, and the Treasury Department, Delphi said in a July 27, 2009, court filing.
A few weeks later, Elliott and Silver Point dispatched lawyers in London to register a new limited-liability partnership, Delphi Automotive LLP, using the law firm’s address near Finsbury Square.
In October, GM, with authorization from the Treasury Department, pumped $1.7 billion from its government escrow account into its new English partnership with the hedge funds. GM’s contribution entitled it to about half of the initial cash generated by Delphi, dropping to about 35 percent over time.
English Home Base
England wasn’t an obvious choice as a new home base. For years, Delphi had sought to diversify its customer base and shift production to lower-cost nations around the world; only about 5 percent of its workforce remained in the U.S. Still, the U.S. was its biggest market, and GM its largest customer. Most top executives lived near the company’s headquarters in Michigan. Delphi had some factories and employees in the U.K., but it had more in the U.S. And the three lead investors in the new Delphi — Elliott, Silver Point, and GM — were all American.
One reason for choosing England was its tax system, according to two people who were involved in the discussions and who spoke on condition of anonymity because the matter is politically sensitive. Given Delphi’s long struggle to achieve viability, a lower tax rate would give it a “fighting chance,” one of the people said.
Lower Corporate Taxes
Along with Ireland and the Netherlands, the U.K. is becoming increasingly popular with companies seeking to flee the U.S. system. In addition to Pfizer, AbbVie Inc., an Illinois drugmaker with a market value of about $85 billion, announced plans last month to become a U.K. taxpayer.
The U.K. not only has a lower corporate tax rate — 21 percent — than the U.S., but it taxes companies only on their domestic earnings. U.S. companies must pay taxes on the profits of their foreign operations — a major hindrance for Delphi, whose factories are spread around the world.
Judge Robert Drain, who approved the sale in bankruptcy court, declined to comment. Spokesmen at Elliott and Silver Point also declined to comment, and Mark Barnhill, a partner at Platinum, didn’t respond to requests for comment.
Hedge Funds Win
The Delphi takeover proved to be a huge win for the hedge funds, and for Treasury-controlled GM. Stripped of its debts and its U.S. tax domicile, the company surged in value.
GM sold its stake back to Delphi in 2011, recognizing a $1.6 billion after-tax gain. Elliott did even better, according to the New York Post. Singer’s fund turned a $300 million investment into $1.3 billion by the time Delphi sold shares to the public that year, the Post reported at the time.
After Delphi got its New York Stock Exchange listing in 2011, its stock continued to advance. With a market capitalization of about $20 billion, it’s now among the biggest and most profitable U.S. corporate expatriates.
Going public required Delphi to switch from partnership to corporate form. Becoming a U.K. corporation, though, would have required an accounting change that could have threatened its eligibility for inclusion in the Standard & Poor’s 500 Index of the largest U.S. companies. Instead, Delphi incorporated in the tiny English Channel island of Jersey, a self-governing Crown dependency that didn’t require the accounting change. Still, Delphi retained an English address for tax purposes.
Under U.K. law, a company incorporated elsewhere can be deemed domestic if it’s “managed and controlled” from there. Chief Executive Officer Rodney O’Neal, 60, an Ohio native who studied engineering at a GM-sponsored college, continues to work in Troy, Michigan, along with most of his top officers.
Delphi meets the “managed and controlled” requirement by holding the majority of its board meetings in England, said Tapia, the Delphi spokeswoman. Ten of the 11 Delphi board members are Americans. The other is from Germany.
One cloud on Delphi’s horizon is the IRS case.
In September 2009, just before GM and the creditors bought Delphi, the IRS surprised them by issuing a noticeinterpreting a five-year-old law meant to prevent companies from shifting their legal addresses offshore. This reading of the law threatened to imperil the tax benefit of Delphi’s shift to England. In securities filings, Delphi said its lawyers disagree with the interpretation.
In June of this year, the tax agency sent Delphi a notice saying that it is still a U.S. company for tax purposes. Although the back taxes it would owe wouldn’t be material, Delphi said in a securities filing, its future annualized effective tax rate would rise to 20 percent to 22 percent if the IRS prevails. That’s well below the U.S. statutory rate of 35 percent, but 3 to 5 points more than the effective rate of 17 percent Delphi paid last year. Most U.S. companies pay less than the statutory rate because of various breaks, including tax credits and deferred taxes on foreign earnings.
Analysts expect Delphi to earn about $2.2 billion before taxes next year, according to the median estimate of 12 surveyed by Bloomberg. Based on that estimate, an additional 3 to 5 percentage points in its tax rate would cost Delphi $66 million to $110 million. The analysts expect pre-tax profit to increase the following year. The IRS declined to comment.
Companies renouncing their U.S. tax citizenship became a front-page issue in April, when the drugmaker Pfizer announced plans for a British address. A few days later, Rattner wrote a column in the New York Times urging Congress to revamp the tax code, and take quick action in the meantime to prevent such tax flights.
“These days, tax avoidance feels like a full-fledged business strategy, with American citizens as the losers,” hewrote.
President Obama took up the theme last month in a speech at a college in Los Angeles, where he called for an end to what he called an “unpatriotic tax loophole.”
“My attitude is I don’t care if it’s legal — it’s wrong,” the president said. “You shouldn’t get to call yourself an American company only when you want a handout from American taxpayers.