Abstract

This paper demonstrates that the interests of American banking and government have converged since the early 1980s and relates this trend to modern financial deregulation, revealing a symbiosis that would later influence the global financial crisis of 2007-2008.

An examination of corporate profit and taxation in the United States reveals an anomaly: from the early 1980s until the financial crisis, banking profits after tax sharply outpaced those of the corporate average despite their effective tax rates having simultaneously increased relative to those of the corporate average.

These conditions created a mutually beneficial relationship between American banking and government, with the former earning higher profits and the latter higher tax revenues. This tax arrangement also bloated the banking sector with unsustainable profitability, and ultimately fell apart during the financial crisis of 2007-2008.

Introduction

Since the late twentieth century, our world has been subject to an extraordinary rise in the power of finance as a leading engine of political economic activity. Modern finance, entrenched in the commanding heights of an increasingly integrated global marketplace, has helped push globalization forward and internationalized capitalism like never before. Initially, this establishment formed a formidable power dynamic that seemed too big to fail, but its ultimate limitations would eventually be exposed during the financial crisis of 2007-2008.

While this crisis began in American banking, it quickly spread to be felt around the world, and its residual effects continue to be felt in what has come to be known as the Great Recession. That a crisis with such significant global impact began in the banking sector of a single country – even one as important as the United States – attests to the globalized nature of modern finance, engendering a deep reassessment of financial stability both in the United States as well as abroad. However, while this crisis has revealed contemporary finance as a heavily transnational activity, the role that American banking played in triggering it remains an important part of the story and thus deserves special attention.

Although the American origin of the financial crisis of 2007-2008 is common knowledge, much of the surrounding analysis has focused on particular instances of deregulation. Despite the admittedly useful understanding advanced by this conventional approach, which correctly notes the unstable power given to American banks in recent decades, its search for a deregulatory sine qua non may have overlooked other important factors.

One seemingly unremarkable yet ultimately crucial part of this ongoing story is taxation: a topic too often neglected amidst the overwhelming complexity of modern globalization, taxation’s ability to redistribute wealth and income must not be overlooked. Accordingly, no matter how complex modern economics or the theories explaining it have become, taxation remains of utmost concern to even the most advanced of modern capitalist business interests and must be properly understood as a regulatory tool in its own right.

Without question, the American banking system, despite all of its modern complexities, is no exception to this rule, and there must be room for taxation in understanding this most recent of crises.

By focusing on the American aspect of this financial crisis through the lens of taxation, we will see how booming banking profits before the crisis padded government coffers, revealing an interplay between banking and government beyond financial deregulation and further cementing the centrality of American affairs in this ultimately global crisis. But to explore the financial crisis of 2007-2008 in terms of American banking taxation, our focus must also shift from qualitative underpinnings to engage in quantitative data.

In particular, banks must be treated as corporations that are taxed on their profits and, like most other corporations, also tend to measure their bottom-line performance in terms of these same profits. In this respect, corporate taxation presents an obstacle to the objectives of banking as a money-making venture. This otherwise unremarkable corporate reality becomes much more significant when considering that not all corporations face the same tax burden. Because effective corporate tax rates can vary, thus subtracting different amounts of profit from even the most similar of corporations,