Saturday, June 13, 2009

the Tax-Exempt feature for banks

One important factor accounting for this great interest in municipals on the part of banks is the higher rate of income tax that banks have had to pay in the postwar period as compared with the prewar period. Greater investment in municipal securities is one way of reducing this tax liability and securing a higher net return.the average market yield on all general obligations of state and local securities was only 5.68 per cent in 1977 as compared with 7.06 per cent on long-term federal government securities. nevertheless, the after-tax yield on these municipal securities was substantially higher than the after-tax yield on government securities, and even higher than return on loans.
Mutual savings banks,savings and loan association are exempt from federal income taxation until their capital funds exceed 12 per cent of liabilities and so these institution have shown little interest in tax-exempts. (This special tax treatment for these thrift institutions, incidentally, is a major reason why banks have charged unfair competition as the reason for the rapid growth of these competitors.) Life insurance companies, also, enjoy relatively low marginal and average tax rates, but nevertheless acquire municipals, though they do not play the relatively important role in the investment portfolio of life insurance companies that they do for commercial banks.

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