Editor’s Note: This story was included in the March 27 Pulse sent to subscribers by BankBeat.
Within hours of the Independent Community Bankers of America calling for credit unions with more than $1 billion in assets to pay income taxes, credit union advocates were crying foul. I understand that competing industries will spar over issues, but when it comes to tax policy, it is important that those participating in the debate stick to reality.
When I read one critic charge bankers with hypocrisy because he said subchapter S banks don’t pay income tax, I knew the debate already had drifted far from reality.
The idea that credit unions and sub S banks are similar because neither pays income taxes is profoundly misleading. While it is technically true that sub S rules do not require corporations to pay taxes, they require the corporation’s income to be recorded on the tax returns of the corporation’s owners, who then pay income tax on the additional revenue. People do not incorporate businesses with sub S rules to get out of paying taxes; they do it to pay tax at the personal rate rather than the corporate rate.
Ask the owner of any sub S business — bank or otherwise — whether they pay taxes on their business income and they will tell you “yes.” Approximately 60 percent of all businesses file taxes under sub S rules. The term “loophole” does not apply.
The U.S. Treasury collects well over $1 billion per year in tax revenue from sub S banks through their owners; it collects essentially no income tax revenue from credit unions or through their owners. In fact, I think most banking industry advocates would consider the issue settled if credit unions paid taxes in the same manner as sub S banks, if that were possible.
Let’s have a serious conversation about tax policy relative to the financial services industry. Stirring emotion with poorly understood, or worse — deliberately misleading — arguments is not helpful to anyone.