A Taxing Worry for the Financial Industry

By Nick Piccone

Congressman Dave Camp’s proposed tax reform bill aims to drastically change tax code for both individuals and corporations. The proposed increases of taxes on the nation’s largest financial institutions has caused outrage throughout the financial industry. 

Tax reform is a constant topic of debate in both the political and business worlds. Tax codes have a major impact on how businesses operate — through a direct impact on a firm’s cost as well as affecting the amount of income individuals have to spend on goods and services. Congressman Dave Camp, a Republican from Michigan, aims to revamp federal tax codes for both individuals and corporations as his proposed bill could become the United States’ single largest tax reform since the Reagan administration’s tax cuts in 1986. Congressman Camp’s proposed 979­-page tax bill has become a major point of discussion in 2014, as well as a cause for uproar in the financial industry due to some specific and rather revolutionary changes to federal tax code.

Congressman Camp plans to simplify and reduce both corporate and individual income taxes. He claims that his reform will create “a simpler, fairer tax code that leads to a stronger economy.” Under his proposal, the highest corporate tax rate would be cut from 35% to 25% for even the largest companies, and the highest individual taxes would decrease from 39.6% to 35%. This rate would only be paid by the wealthiest individuals—those with an annual income greater than $400,000. Additionally, the number of individual income tax brackets would be reduced from seven to just three tax brackets of 10%, 25%, and 35%. Thus, Congressman Camp’s proposed bill would help free up income for almost all American households while ensuring that the heaviest tax burden is paid by the richest Americans. The proposed reductions to income taxes would be offset by the elimination of dozens of tax breaks and loopholes. It would also broaden what constitutes “income” for many individuals to include items such as municipal bond interest, which was formerly tax ­exempt, and employer ­provided health insurance.

Congressman Camp’s tax bill would redefine what is considered income for many managers of financial institutions. Under current tax law, managers of certain financial institutions, such as hedge funds or private equity firms, are able to file their income as “carried interest” from investments, which is currently taxed at the capital gains tax rate of only 20%. Under Congressman Camp’s proposed bill, carried interest would be subject to an effective tax rate of 25%, subjecting these extremely wealthy financiers to a higher tax rate, though still below what the rest of America’s wealthiest would pay. As a result, Congressman Camp projects this tax increase to generate at least $3.1 billion in federal government revenue through the year 2023.

In addition to imposing greater taxes on the income of some of the wealthiest investors in the country, Congressman Camp’s tax reform aims to levy a new tax on the assets of some of the largest financial institutions in the world. The tax reform plan proposes a quarterly tax of 3.5 basis points on the assets of financial institutions that hold more than $500 billion worth in assets. In other words, the largest banks and insurers in the nation will have pay a .035% tax four times a year if the value of their assets is greater than $500 billion. Thus, JPMorgan Chase & Co., which claims assets in excess of $2.4 trillion, would pay an additional $2.7 billion in taxes annually. The proposed tax on assets is projected to bring with it an increase in government revenue of $86.4 billion over the next decade.

While this tax will only affect about 10 to 20 companies, such as Goldman Sachs and AIG, it has unsurprisingly sparked outrage from the financial industry. Rob Nichols, president of the Financial Services Forum, a group comprised of the CEOs of the 18 largest financial institutions operating in the United States, has criticized the proposed asset tax, claiming, “A tax that singles out one specific industry is utterly inconsistent with the fundamental goals of tax reform to lower rates, broaden the base, and remove industry­ specific treatments.” Congressman Camp’s proposed tax code is thus shifting the tax burden, perhaps unfairly, away from the majority of individual households and instead onto large financial institutions and their managers, which could thus have large negative impact on lending throughout the nation as a result.

While it is highly unlikely that Congressman Dave Camp’s tax reform will be voted on this term, at least in its current form, it has created a very real foundation for future tax reform. The proposed bill has also sparked outrage among the financial institutions of America, which are run by some of the wealthiest and most powerful men and women in the United States. If voting on such a bill does occur in the near future, Congressman Camp and his supporters should expect incredible lobbying efforts against its passing, funded in part by these extremely rich financial institutions. Although it is unlikely that the proposal will be passed in its entirety, it is possible that certain aspects of the bill may at some point be incorporated into federal tax code. As a result, the nation’s largest banks, insurers, and investors must prepare for the risk of increased costs in the near future.