Friday, May 1, 2009

More Q&A

George, a Wells Fargo loan officer in Denver asks:

Q: How would your so-called “10% on everything” tax affect banks and borrowers?

A: Competition for new loans would be fierce, keeping interest rates at rock bottom, because there is no tax on bank interest income. The front-end 10% tax to the borrower would be shared to some extent by Wells Fargo as a “loan acquisition cost”, and the remainder added to the borrower’s loan principal, to be paid off over the life of the loan.

For example, let’s say “Joe the Plumber”, walks into your office for a 500 grand loan to either expand his business, or buy a larger home for his expanding family. You’re an aggressive guy, so you offer to split the 50 grand tax bite 25/25, and give him a long-term (home) or short-term (business) loan at prime plus 1%--say 5%. You shake hands, and everybody goes home happy.

Uncle Sam is happy because he just made 15 grand (his 30% share); Denver City and County is happy, because they just made 30 grand (their 60% share); Joe is happy, because he has half-a-mil in cash to fund his business, or to buy his new 4-bedroom house, making his wife happy; you are happy, because you just made a 5 grand commission, making your wife happy; Wells Fargo is happy, because they will be making a net 2% profit after charging off the 25 grand loan acquisition cost and your 5 grand commission to current expense. Lastly, Wells Fargo stockholders are happy, because their investment is going gangbusters with no hidden surprises, bumping up their stock price and tax-free dividends.

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