Here’s something you may not have considered: The massive losses taken by Wall Street Banks and Brokers is going to wipe out their profit for the next few years. About $500 Billion in write downs have already occurred. Best estimates for the total that will get written down range from $1 trillion to $2 trillion dollars.
That’s not only very bad for the firms, their shareholders and employees — its also going to be very challenging for the regions where they are headquartered and do much of their business.
In New York State, the 16 largest banks sent taxes totaling $5 million in the most recent reporting period; that compare with $173 million from the same period a year ago.
Taxes paid are down an astonishing 97%!
And, its not just New York. Other money center regions in the US are running into similar problems: California, Connecticut, Virginia, Illinois, and Massachusetts are also likely to have related tax shortfalls. There will be other cities and states beyond these.
Bloomberg reports that:
"Wall Street’s mortgage losses have grown so large that some firms may pay little or no taxes for years, widening New York City and state deficits and challenging their ability to provide services, Mayor Michael Bloomberg said.
Some companies are seeking refunds from the city on taxes they paid ahead of time, saying losses have cut their tax liability to zero. The banks pay tax on 110 percent of earnings in advance as a "safe harbor,” protecting against penalties for underpayment.
"It will be a number of years before Wall Street starts paying taxes again,” the mayor said at a press conference yesterday in Manhattan. "They will carry forward all of those losses.”
Financial firms posted $501 billion in writedowns and credit losses worldwide since the start of last year, a figure the World Bank predicts may rise to $1 trillion as the credit squeeze sparked by the subprime market collapse worsens. The tax drain is particularly serious in New York, where Wall Street accounts for 20 percent of state revenue and about 9 percent for the city, state Comptroller Thomas DiNapoli has said. (emphasis added).
Its not just here in the USA that the credit crunch problem is impacting the tax base. Acrodss the pond, the UK is experiencing a similar problem, courtesy of Merrill Lynch’s recent write downs of $29 Billion dollars.
The FT notes that "If Merrill’s UK subsidiary were to continue to generate profits at 2006 levels, a record year for the investment banking business, it would pay no UK corporation tax for 60 years."
Merrill Lynch is unlikely to pay corporation tax in the UK for several decades after $29bn (£16bn) of losses suffered by the US investment bank were charged to its London-based subsidiary.
The figures, published in Merrill’s regulatory filings, emphasise how the meltdown in the US subprime mortgage market is undermining tax receipts for governments far beyond America’s borders. They also offer a rare glimpse into the tax management policies of a global financial institution.
The losses arose because almost all of Merrill’s global activity in the market for collateralised debt obligations – complex debt securities, often backed by subprime mortgages – has been channelled through Merrill Lynch International, its UK-based subsidiary.
60 years? Gee, that seems like an awfully long time to go with loss carry forwards. Then again, $30 billion dollars is some real money. But it gives you a sense of exactly how much self inflicted damage the financial sector is suffering.
On the Federal level, we see the continued slow down of personal income tax in the US. Thisis likely to accelerate as the recession gets deeper and more prolonged, layoffs add up, and income slows:
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Chart courtesy of Matt Trivisonno
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Consider these corporate and personal tax shortfalls. Then look at a recent congressional study showing that most firms pay no income taxes — a misleading but incendiary headline — and you can make the safe bet that whoever gets elected, we will see a new reach for corporate taxes. Watch for various proposals cutting the corporate tax percentage (i.e., 35 to 25 or 30%) but some major loopholes changes.
My forecast: Thanks to the credit crunch, the tax burden on non-financial firms 3 years from now will be appreciably higher than they are today — regardless of the November 2008 election outcome. And, they are likely to stay that way for quite a while . . .
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Previously:
Financials: Worse than they look? (November 08, 2007)
http://bigpicture.typepad.com/comments/2007/11/financials-wors.html
Sources:
Wall Street Losses Cut Tax Bill, Sap New York Revenue
Henry Goldman and David Mildenberg
Bloomberg, Aug. 12 2008
http://www.bloomberg.com/apps/news?pid=20601109&sid=a4A3yRSaEHRA&
Merrill books loss to London unit and avoids UK tax for decades
Peter Thal Larsen in London and Francesco Guerrera in,New York
FT, August 15 2008 03:00
http://www.ft.com/cms/s/0/56af1850-6a61-11dd-83e8-0000779fd18c.html
Merrill Books Losses Through U.K., Can Offset Taxes
Zachary R. Mider and Cathy Chan
Bloomberg, Aug. 15 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aONZ6mYLFBog&
Most firms pay no income taxes – Congress
David Goldman
CNNMoney.com, August 12, 2008: 4:38 PM EDT
http://money.cnn.com/2008/08/12/news/economy/corporate_taxes/index.htm
looks like the little taxpayers will be paying a lot more in future, and not just to cover the bailouts. We have spent well beyond our means, and the piper now needs paying.
Will we see more personal and corp. money move offshore?
With all due respect to Matt for collecting the information in the tax withholding chart, one important item to note in that graph is that marginal tax rates declined the early part of this decade. The weakness in tax collections between 2002-2003 is due as much to this as the weakness in the economy.
I did a little work to try to restate the data for the change in marginal tax rates and found that if no changes occurred, withholding tax growth would have remained positive during 2002-2003…although just barely! The fact that growth is now going below 2% (ie. below inflation) is not a good sign!
I should correct myself…
When I say below 2%, I should have said WELL below inflation just in case anyone believes that I think inflation is only 2%!
And the federal deficit will be worse
if you think this is volatile, wait until the NY Legislature passes this idiotic “millionaire’s tax” on incomes over $1 million.
Just a sidenote. I know a municipal tax collector who told me that the banks don’t pay property taxes on foreclosed properties. Even after they go to tax sale, the interest rates are so low that they usually ride it out until the property is sold and they have to.
A serious question: Does anyone see any way out of this except for central banks to severely devalue currencies?
This is not snark. I can’t see any other option for CB’s other than the printing press in order to make the debt load look reasonable. I understand the effect this will have, but is there any other option? I’d like to think otherwise, but can’t.
This post just reinforces the unforeseen outcome of deregulating interest rates in the early 1980s.
I know that sounds terribly simplistic; but, we are in a situation where the entire financial system (at least in the US) is out of balance.
By deregulating the interest rates banks are required to pay depositors has indirectly allowed the whole system to get fat off the backs of depositors.
This loop hole has been exploited to the point there is no longer any investment available for the non-financial professional that pays a decent return; thus forcing the entire herd in the same direction. We have lost any semblance of diversity among investment classes.
If the Fed would return rates to a normal range at the appropriate time during economic recoveries we could eventually get out of this continual boom-bust gyration.
We must get Wall Steet and the Fed off this drug called “cheap money”. They are robbing the very people who are the most responsible (with their money) and in turn blowing it.
A good analogy is a young thug stealing a brand new Lexus. Since the car is hot and the thief never made a car payment in his life crashes the new car into a telephone pole. Everybody loses: the owner, the thief & the insurance company. There are no winners in this out-of-whack game of finance going on in this Country.
Not only does Joe Sixpack bailout the financially astute execs of Wall Street, he may very well need to find another place to live as well.
…Unbelieveable!! For a lot of people, the American dream is just that, a dream!
It seems rather obvious to me that the entire System is stacked against the little man. All of the big-wigs get bailed out while the little guy gets screwed. Somehow that just doesn’t seem right to me.
And yet today we have Murdock’s paper whining about the US highest corporate tax rate. Yeah, who pays that rate is the question Murdock?
Remember – only the “little people” pay taxes.”
Just to pile on, what about all the real estate transfer taxes lost on home sales…first by sales at lower prices…then by many fewer sales than before.
The bigger hit will come not from the lost tax revenues from the banks (who pay nothing in taxes anyhow), but in lost tax revenues from wages that will vanish into thin air, through layoffs, lost bonuses and outsourced jobs.
The NYC economy hasn’t been touched yet, but I’ve been bracing for a nasty hit for awhile. I’m assuming that this bonus season will be the first step towards that blow.
Seamus, there is no such thing as a printing press. That speech by Bernanke is pure jawbone.
The Fed does NOT make money.
The way US dollars are brought into circulation is by selling a debt (T-bill) to foreigners. The reason for the public backstop of FNM/FRE last week was… China threatened to dump all their agency holdings. How much agency debt does China hold? *drumroll* The exact amount of the publically stated backstop. Coincidence? No.
The emperor has no clothes. Get used to it.
Another 800 pound gorilla is the public pension/health care issue. Govermental pensions are some of the best around with seeral states offering higher rates, etc. for early retirement. Obviously, with lowered tax revenues they cannot fund these pension promises nor will their returns in this market keep up with projections.
It’s easy to raise taxes on all your residents but try and cut pension obligations. Stay tuned.
What’s astonishing here is how little tax the banks paid to NY state. $173 million is a rounding error in that state’s budget. It’s the retail and property related taxes that are dragging down the states and localities.
Man I’m glad I left NY 2 years ago.. Great place to visit, TERRIBLE place to commute, pay taxes, buy groceries, or insure a car… Grew up in the NYC burbs and went to school in-state, but I could see the handwriting on the wall for my own job type (backoffice tech): why pay NYC taxes, ConEd power rates and thousands of bucks a square foot for a datacenter in NYC, when you could have the same build elsewhere (even within the US) for far less?
Only reason my parents are still in NY is because their retirement income is not taxed and the typical retiree haunts hold no attraction for them (too hot or too cold, mainly)..
The number I have read for lost WS bonuses this year is 18 Billion…hows that for reverse stimulus.
Of course this is all peanuts…the counrty is on the hook for 80 Trillion in unfunded Medicare liabilities.
BTW, deflation is officially here…my only investments are cash and QID.
They only paid $5 million in taxes? Clearly, a windfall profits tax is in order.
The deflation phase is now upon us. LOB.
This topic reminded me of a letter to editor from 1985. RAPE – a local eco group was pushing for rules regarding siting a local landfill … me – “waste created in this country must be stored somewhere, RAPE just doesn’t want it to be here. I’m not saying I want it here either but if you create the waste you should store it in your backyard. Then we will have Residents Against a Polluted Enviroment.”
I think we need more financial balancing of the books inside regions of our country. Wall Street the financial capital of the world has to much capital flowing thru its fingers. Sorry WS. Oh ya, Washington too.
Illinois contributes to the world economy and California does too, but the state books tell some other story is going on.
Hey unsymp,
The “printing press” was a metaphor. Cripe, I know how money is created. C’mon, negative real interest rates coupled with the multiplier effect are in essence a “printing press”. The debt I’m referring to is that held by the consumer and the obligations of the investment banks. Both have the potential to grind economic activity to a dead halt, as I’m seeing (the “as I’m seeing”meaning maybe I’m myopic, but not a complete imbecile regarding how money works). This relates to the tax issues involved in the posting. Dead economy equals tax shortfall. What I’m asking is whether or not there is any other option besides seriously devalueing the currency? And what does that look like?
I am squarely on the deflation bus.
The next year will see dramatic evidence of deflation in the NYC economy. If you add the lower Wall St bonuses, lower business taxes, lower RE taxes as the market freezes, lower state taxes paid by fewer workers and lower sales taxes on purchases by NYers and visitors (now that we see declining Euro and £), that is a lot of money out of the local economy and state coffers.
One thing that will not be going lower is yields on munis and high yield bonds. LIBOR is continuing to rise and all kinds of spreads are widening. Since the credit market is always ahead of the equity market, we are probably going to see an end to the Larry Kudlow Summer Rally soon. Just look at Treasuries this week – now that the inflation data is moderating, that is a lot of smart money leaving the building…..
“…the tax burden on non-financial firms 3 years from now will be appreciably higher”
The damage these people (investment bank in particular) have done to so many other people is incredible… yet our government rushes in to bail them out with the argument that they are our ‘financial system’.
“…the tax burden on non-financial firms 3 years from now will be appreciably higher.”
“In New York State, the 16 largest banks sent taxes totaling $5 million in the most recent reporting period; that compare with $173 million from the same period a year ago.”
Only 173 millions?
I have a suggestion.
Remember how we passed a law so that effectively we allowed taxpayers to not pay taxes on their housing-related losses?
Maybe we need something separately for financial firms to not count their losses. I mean, because, aren’t they just different sides of the same coin?
It’s just passing the tax liability of gains from leveraged capital losses from the benficiary to the loser. They are, after all, losers. To the victor goes the spoils!!
On the other hand, I think that might not incentivize lending if the lender becomes liable for everything… maybe we need even MORE government intervention! I know, guarantee free houses to all people and corporations have to pay for it. Then, when the corporations fail, we can nationalize them and complete the cycle to socialism!
Chuck Ponzi
I am not so sure about this supposed impact of lost taxes. Here in the heart of the Rust Belt, competition to woo employers is fierce, and the first thing to go is corporate taxes. Employers siting new plants are ALWAYS given huge (decades-long) intervals of no corporate taxes as incentives to put a plant here. I’m pretty sure it’s the same in surrounding states. So it’s not like there is a huge base of corporate taxation to be lost.
States will easily recoup any lost taxes by hiking sales taxes. Yeah, that puts the monkey on the back of Joe Sixpack, but who do you think ultimately pays those supposed corporate taxes, anyhow? The stockholders? Nope, the impact of taxes on any corporation is passed along to their customers.
If anything, the stockholders will be the beneficiaries of these big carry-over losses, via a small boost to the reported earnings (at the cost of a huge hole in the balance sheet).
Just another way of looking at things.
I’m waiting for Schwab to takeover Merrill, sell of everything but the retail part of the business, and bask in the limelight of everyman’s broker plowing under the bull of Wall Street.
Remember when Merrill used to advertise themselves as “Bullish on America”?
Why should non-federal taxes go up in places where normal people live?
Now look at the results.
Few will be aware of it.
Ha! This post contains the key to how the banks get recapitalized: They use their tax credits as bait to get acquired by companies in profitable (other) industries which have the ability to use up the credits in some reasonable number of years. Just think…Apple Lynch, Google-Citi, Wal*Mart Bros.
Problem solved.
Steve G,
I believe there may some accounting/tax rules that may make it rather difficult for the acquiring company to fully utilize the NOL’s (tax credits) of the acquiree company in a business combination.
Great post!
In addition to the direct tax exposure, most of these goliath banks are making massive payroll cuts, which will also affect the local economies, which then in turn causes…lower taxes to be paid.
This is the start of a really nasty vicious cycle, yet the market wants to rally. This next week will be crucial in the markets, I believe we will pick a direction, up or down, and run with it.
Declines in tax revenue – Solution set: slash government, stop government hiring, slash their pensions/perks.
Interesting that this is hitting states with heavy Democrat infestation. Let ’em rot.
-from a Mass. resident