Fact of the Day: Consumer Sovereignty
In the last four weeks, as anger over debit card fees festered, more than 650,000 customers signed up for credit unions, according to the Credit Union National Association.
Via NY Times.
CARPE DIEM
Professor Mark J. Perry's Blog for Economics and Finance
Tuesday, November 08, 2011
About Me
- Name: Mark J. Perry
- Location: Washington, D.C., United States
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
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25 Comments:
Dang, you mean competition works?
I'm thinking of switching to a credit union after my fiancee and I get married next month. I realize the debit card price fixing wasn't the banks' fault, but it was probably the last straw for a lot of people.
I do business with two credit unions. One of them had a small flyer late spring urging us to contact our "Conservative Republican" Senator, Bailout Bob Corker to vote against the interchange fee price-fixing legislation because they "may not be able to continue offering us our 'free' services". Corker cosponsored an amendment to S782 to specifically exempt the debit card portion to a study on the fees (which was defeated). S782 hasn't passed, meaning the gov't interchange fee price-fixing isn't yet in place, but some banks proceeded to create new debit user fees (immediately after this amendment was introduced), while still enjoying whatever interchange fees they already collect. The credit unions will be affected if this bill passes.
Professor.
I am disappointed with you on this one. The fact of the matter is that Senator Durbin and the left wing loons at Consumers Union manufactured outrage. That's not exactly the free market.
aorod,
Agreed. It's time credit unions lose their tax exempt status.
There is no good reason credit unions should enjoy this special interest loophole while the rest of corporate America pays taxes.
Fairness: Either everyone pays taxes or no one pays taxes.
bob wright,
Any profits from credit unions are distributed to the members and they pay the taxes on any profits. That is the way corporations should be taxed, too.
Do you agree with double taxation? Should we fix something that is right just so it will be like the other things that are wrong?
I've been a credit union member for over 38 years. I've never found a need for a traditional bank.
Walt,
I do agree with you.
Corporate profits should not be double taxed.
The elimination of the corporate income tax would be the ideal solution.
My larger point was that credit unions [I am a member of a local credit union] should not receive special treatment.
Credit unions and commercial banks should be taxed the same way: either they both pay income tax or no taxes are paid by both.
bob wright,
Credit unions exist and are designed as non-profit organizations. Do banks wish to purposely operate as non-profit organizations? If so, I agree with you they should be taxed the same way, but I will very quickly dump all my holdings that have bank stocks in them.
I want my credit unions as non-profit organizations and my banks as profitable organizations: two different animals with two different taxation policies. To say that commercial banks and credit unions are the same thing denies their basic financial realities.
Kinda funny that CP is celebrating the existence of credit UNIONS! LOL
From it's beginnings in the mid 19th century in Germany, the credit union movement first appeared in North America in Quebec City around 1900. The first CU in the US was launched in New Hampshire ten years later by french canadian immigrants who moved there to work in the textile mills.
The credit union movement is all about collectivism and taking the PROFIT out of the business of financial transactions.
The world is not black and white, now is it?
walt-
"Any profits from credit unions are distributed to the members and they pay the taxes on any profits. That is the way corporations should be taxed, too."
this seems like a pretty half baked idea.
corporations that distribute all their profits will routinely get caught short if they hit a rough patch.
retaining earnings is a very important part of growing many businesses and in maintaining the kind of financial stability that makes customers comfortable using you as a vendor.
you work in autos.
imagine this scenario:
all your suppliers distribute all earnings every year. as a result, they have very little cash. thus, every downturn, they go out of business in droves. it's not like you can ask for it back when you make a loss.
you really want to deal with that as opposed to retained earnings?
it's also ruinous for investors.
you get a tax bill on your holdings.
if ibm earns $13/share, you owe tax on it.
that means you will likely have to sell stock to cover it. 13 X 40% (gotta include state) = $5.20 in taxes.
that's 3% of your holding you need to liquidate which triggers yet more taxes.
if you want to eliminate double taxation, just get rid of cap gains taxes and taxes on dividends.
regarding the idea about just eliminating the corporate income tax, i think that's an idea fraught with problems.
we'd all just incorporate.
i'd become a company and hire on a a consultant anywhere i worked. bingo, no tax.
i'd have a corporate headquarters at my house, corp cars, corp travel, you name it.
i'd let it pay for everyhting.
my kitchen would be the corporate cafeteria.
i fear that you'd pretty much destroy the whole tax base that way and drive lots of very silly behavior.
"it's not like you can ask for it back when you make a loss.
Maybe you shouldn't have used auto makers as an example. ;o)
morganovich,
Any excess profits from credit unions/non-profits are distributed to the members as determined by a board of directors elected by the members. Non-profits routinely retain earnings for expansion and other strategies.
As long as taxes are paid on the profits, does it matter who pays them? Corporate taxes are paid for by either the consumer or shareholder anyhow so why not be honest about it?
By having a corporate tax we are creating a scapegoat for people to blame and justify higher taxes. After all, who really cares if big, bad companies get socked for more cash? We all should because we are paying for it.
I am aware you probably know more about this topic than I do. I just hate seeing consumers being so willing to tax themselves in the name of taxing the big, bad corporations/rich people.
morganovich: "it's also ruinous for investors.
you get a tax bill on your holdings.
if ibm earns $13/share, you owe tax on it."
As a part owner of the business, I already pay taxes on any earnings I receive in the form of dividends. Why should those earnings be taxed before I receive my share?
"we'd all just incorporate.
i'd become a company and hire on a a consultant anywhere i worked. bingo, no tax."
Sounds good to me.
"i fear that you'd pretty much destroy the whole tax base that way..."
That sounds like a GOOD thing.
"...and drive lots of very silly behavior."
Do you mean unlike now? :)
walt-
i think you are really missing the boat here.
the reason credit unoins can send profit to shareholders on a pretax basis is that they HAVE TO.
REITs work the same way.
they also do not have actual operating businesses in the way that say, a muffler plant does.
they hold money and they lend some.
if they go into the red, they cut interest on deposits.
if they go bust, it can get pretty sticky.
requiring corporations not to retain earnings is a disastrous policy.
there is ZERO reason to prefer it to just eliminating a tax on dividends and many reasons (like forced selling to cover taxes) to avoid it.
you are confusing indifference on who pays taxes with actually distributing profits.
it's not the same thing at all.
"As a part owner of the business, I already pay taxes on any earnings I receive in the form of dividends. Why should those earnings be taxed before I receive my share?"
this is a totally separate argument.
i never said double tax was good or fair. but the way to address it is to eliminate tax on dividends, not require tax free distribution of profits.
regarding the rest of the argument about loopholes for the tax base, again, i think you are looking at it the wrong way.
to reduce the tax base by crating lots of stupid loopholes that encourage odd behavior is a terrible idea.
i'm all for reducing the tax base and cutting massively into federal spending and reach, but we need to do it in a straightforward way, not some roundabout kludge.
TC: Kinda funny that CP is celebrating the existence of credit UNIONS! LOL
The credit union movement is all about collectivism and taking the PROFIT out of the business of financial transactions.
The world is not black and white, now is it?"
You are confused. Do you understand that a credit union is an organization of people with something in common - In your example textile workers - who voluntarily join together in a common interest for their mutual benefit?
This is exactly the type of activity many CP readers advocate. A person can join or un-join as they wish.
That is not collectivism as the word is commonly used:
"Collectivism means the subjugation of the individual to a group -- whether to a race, class or state does not matter. Collectivism holds that man must be chained to collective action and collective thought for the sake of what is called 'the common good'." -- Ayn Rand,
Profit, on the other hand, isn't a dirty word. Why would you want to take the profit out of the world of financial transactions? If you ask for, and receive a service, don't you expect to pay for it? The reason that service is available, is because someone hopes to profit from providing it to you.
morganovich: "i never said double tax was good or fair. but the way to address it is to eliminate tax on dividends, not require tax free distribution of profits."
I was thinking more of eliminating corp taxes. If there is to be a tax on earnings, dividends would be the fairest thing to tax.
"regarding the rest of the argument about loopholes for the tax base, again, i think you are looking at it the wrong way.
to reduce the tax base by crating lots of stupid loopholes that encourage odd behavior is a terrible idea."
My comment was somewhat tongue-in-cheek. The current tax code already encourages ridiculous behavior.
"i'm all for reducing the tax base and cutting massively into federal spending and reach, but we need to do it in a straightforward way, not some roundabout kludge."
I agree. A good place to start might be eliminating corp taxes.
morganovich,
Your comment and mine are the same: non-profits and profits operate differently because they are designed that way and have different purposes. I would compare credit unions to churches and not muffler shops.
The argument began with bob wright's comment about the same taxation of non-profit organizations and those designed for profit and not the actual profits from business transactions.
thanks Ron H for setting me straight me on the precise meaning of collective....I should have use cooperative I guess.
"Why would you want to take the profit out of the world of financial transactions?" Because I want that profit for myself...that's what CU members are doing.
thanks Ron H for stetting me straight of the precise use of collective...I should have used cooperative.
"Why would you want to take the profit out of the world of financial transactions?" The answer is because I want that profit for myself...and what CU members are doing.
"I was thinking more of eliminating corp taxes. If there is to be a tax on earnings, dividends would be the fairest thing to tax."
i don't think so at all.
it's highly distortionary. once you have made money and paid taxes on it, why should shareholders be taxed again?
if you get rid of corp tax but tax dividends, you suppress dividends.
why would i want one? i want them to retain earnings and have the share-price go up. cap gains are better.
the fairer and more consistent course is to tax corporations like people, but have zero tax on dividends and cap gains.
"My comment was somewhat tongue-in-cheek. The current tax code already encourages ridiculous behavior."
understood, but making that's no reason to encourage more. we should be trying to reduce it, not up it.
you jump then to eliminating corp taxes flies in the face of such a reduction.
the real way forward is normalization. if you are going to tax individual and corp income, do it uniformly and on a flat basis.
then make dividends and cap gains tax free.
that encourages investment as opposed to our current system which encourages debt and consumption.
walt-
then the real question is why should non profits be tax free?
it's one thing for the red cross to get a break, but a credit union looks just like a bank and competes with them. they should be treated as one.
what's the case for their special treatment?
morganovich: "it's highly distortionary. once you have made money and paid taxes on it, why should shareholders be taxed again?"
They shouldn't! My suggestion was to eliminate one of those taxes.
You most likely know why it would be better to eliminate the tax on dividends rather than on the corporation, but I don't see much difference between taxing the earnings of the owners of a business individually, and taxing them as a group.
Of course, I would also say that taxation is theft, so any reduction or elimination of any tax is a good thing, in my view.
Getting back to the subject of the post, yes, it's consumer sovereignty but in this case sovereignty for morons. Before this law goes into place, non-debit card customers are subsidizing debit card users with the higher prices they are forced to pay for the same products, since the fees were applied on the backend to the retailers. As much as I don't think the govt should get involved in this market, the move from such backend fees to upfront fees is a good one. The alternative is for retailers to charge a fee for accepting credit or debit cards, which would be fine too. Of course, the fees are probably too high in the first place, as technology has dropped the costs associated with transfering money and verifying identity, so there are a lot of cross-cutting issues here.
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