While the country was distracted by the $700 billion bank bailout, Treasury secretary Henry Paulson made a change to the tax code which removed the limits on the losses that companies that take over banks can subsequently deduct from their taxes. This change meant, for example, that Wells Fargo could deduct the $74 billion in losses that Wachovia had already incurred when it took over the bank. This would provide Wells Fargo with approximately $25 billion in almost immediate tax savings. The law previously allowed Wells Fargo to deduct just $1 billion a year of these losses for a period of 20 years. The Post article cites various experts who put the cost of this change in the tax code as between $105 and $140 billion. It would have been useful if the Post had placed this figure in some context. Presumably it refers to the tax savings in the near future on takeovers, based on losses already incurred by banks. If the revenue loses are realized over the next three years, then it will be equal to between 2.6 percent and 3.5 percent of projected revenue over this period. The article includes several statements from people (some identified, some not) asserting that Congress is reluctant to question Paulson's ruling on this issue because of the harm that such questioning could do to financial markets. While this is possible, it is also possible that their reluctance to question the tax break stems primarily from their desire to appease the banking industry, which is a very powerful interest group. Members of Congress are sometimes known to act more out of concern for important interest groups than their concern for the public good. The article is actually somewhat unfair to the Post when it asserts that the change in the tax code attracted little attention at the time it was put in place. The Post actually ran a page 3 article on the change at the time it went into effect.
--Dean Baker
