All Stories

Getting a Raw Deal From Your Bank?

Your bank’s tax status could be costing you

You probably don’t know if your bank files its taxes as an S corporation or a C corporation, but your wallet might.

When it comes to taxes, all C corps face a double whammy: they pay a tax on profits, then shareholders pay a tax on the dividends they receive from those profits; S corps skip the corporate income tax.

New research coauthored by Petro Lisowsky, an associate professor of accounting, suggests that banks that switch from being C corps to S corps pour the resultant tax savings into marketing budgets and customer benefits. “When you’re doing your personal banking at a C corporation bank, you’re [likely] paying higher interest rates on your mortgage and receiving lower interest rates on your deposits,” says Lisowsky. “Banks are passing those costs on to you.”

While all banks were required to file as C corps for decades, regulations were relaxed beginning in 1996, allowing them to move to the tax-advantaged S corp form. To learn how different tax structures affected competition, Lisowsky and his colleagues analyzed 14 years of data from more than 4,400 private commercial banks across the United States.

For banks that made the switch to being an S corp, the aggregate savings from the first year of tax reductions was more than $372 million. In the years that followed, those banks bumped up deposit interest rates by an average of 1.2 percent for core deposits and 1.4 percent for large deposits. Banks also increased the amount they spent on advertising and marketing by about 11 percent.

For Lisowsky, the larger lesson isn’t just about bank tax structures, but about the complexity of the country’s tax system itself. “Companies will always find ways to take advantage of tax structures, assembling and reassembling themselves like crossword puzzles,” he says. “It’s time to pare down all of these complex business structures. It’s time to simplify all the forms that businesses take so we can level the playing field.”