ITEP and income taxes for 3 banks

The Institution on Taxation and Economic Policy (ITEP) published yet another report about corporate income taxes allegedly paid for the year 2018. The Washington Post, YahooFinance, CNBC, CBS News, FoxBusiness, and Axios all helped publicize ITEP’s report. Probably more have or will.

A key part of the report is: “Just five companies—Bank of America, J.P. Morgan Chase, Wells Fargo, Amazon, and Verizon—collectively enjoyed more than $16 billion in tax breaks in 2018.”

Let’s compare ITEP’s reporting to the three banks’ 10-K or annual report. If a viewer clicks on “Appendices” in ITEP's report and “Alphabetical” on the next page, then the resulting table shows 379 major companies along with their alleged taxes paid in dollars and percent of profit. Only three show a profit more than $25 billion – the three banks named above.

Bank of America

ITEP shows a profit of $30,527 million and a tax of $816 million, making an “effective” tax rate of 2.7%. Bank of America’s 10-K page 148 shows "current" U.S. federal income tax expense of $816 million, but also $2,579 million deferred U.S. federal income tax. ITEP ignored the deferred part. ($816 + $2579)/$30, 537 = 11.1%, more than 4 times ITEP’s 2.7%!

J.P. Morgan Chase

ITEP shows a profit of $ 31,414 million and tax of $2,854 million, making an “effective” tax rate of 9.1%. JP Morgan’s 10-K page 265 shows "current" U.S. federal income tax expense of $2,854 million, but also $1,359 million deferred U.S. federal income tax expense. ITEP ignored the deferred part. ($2854+$1359)/$31,414 = 13.4% is about 1.5 times ITEP’s 9.1%.

Wells Fargo

ITEP shows a profit of $26,718 million and tax of $2,382 million, making an “effective” tax rate of 8.9%. Wells Fargo’s 2018 annual-report page 265 shows "current" U.S. federal income tax expense of $2,382 million, but also $1,706 million deferred U.S. federal income tax expense. ITEP ignored the deferred part. ($2,382 + $1,706)/$26,718 = 15.3%, about 1.7 times ITEP’s 8.9%.

General Comments

In Appendix 2 the author tries to defend using only GAAP “current” federal income tax expense, while ignoring the deferred part. Others have criticized it; I side with the critics. He says what corporations disclose in their annual reports are the best (and only) measure of what corporations really pay (or don’t pay) in federal income tax. There is a paucity of data about taxes paid in 10-Ks and company annual reports. (Bank of America’s and JP Morgan's showed only numbers with U.S. federal, state, and foreign combined. Wells Fargo showed nothing about taxes paid.) However, it’s misleading to portray only GAAP “current” federal income tax expense like it is taxes paid. He says: “The 'deferred' portion of the tax provision is tax based on the current year income but not due yet because of the differences between calculating income for financial statement purposes and for tax purposes. When those timing differences turn around —if they ever do —the related taxes will be reflected in the current tax expense.”

I contend that the last sentence is false. The deferred part is "due" -- meaning be booked in the current accounting period -- rather than "not due yet." Deferred taxes "not due yet" goes on a balance sheet, not an income statement (link). The deferred part often contains depreciation for capital spending in earlier years for which accelerated depreciation was used for income taxes.  Also, the deferred part of the current year’s provision for income tax is not combined with the “current” part. Both Bank of America’s 10-K and Wells Fargo’s annual report attest to this.

Bank of America’s 10-K page 98: “Current income tax expense reflects taxes to be paid or refunded for the current period. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.”

Wells Fargo’s annual report page 115: “Current income tax expense represents our estimated taxes to be paid or refunded for the current period and includes income tax expense related to our uncertain tax positions. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.”

Deferred tax assets and deferred tax liabilities are firstly balance sheet numbers. Like the two banks explain, it is only how much the balance changes between the start and end of the reporting period that affects the statement of income and expenses for the reporting period. If the “deferred” part of the expense was combined with the “current” part, there would be no reason to show the deferred expense part separately. “Current + deferred” better corresponds and coheres with reality. 😊 The deferred expense part should not be ignored, but ITEP does it anyway.