The Washington Post has an explanation for Wachovia receiving bids from Wells Fargo over Citibank in its buyout competition: Tax Relief. A change in the tax laws gives Wells Fargo an advantage over Citi, allowing Wells Fargo to book losses at Wachovia versus gains at other part of the business, thus reducing taxable income.

As opposed to the Citi bid, Wells Fargo does not rely on an FDIC bailout, rather accepting losses and gains, much like any other business. “This agreement won’t require even a penny from the FDIC,” Wells Fargo chairman Richard Kovacevich said.

But then the Post throws a curveball, suggesting that avoiding corporate taxes on losses somehow shortchanges the IRS.

“Experts in tax law said the Wells Fargo deal actually was likely to be more expensive for the government. Losses on Wachovia’s portfolio of bad loans would have been absorbed by the FDIC, which is funded by the banking industry. Under the tax law change, those losses instead will allow Wells Fargo to reduce its taxable income”

I am not convinced the “experts in tax law” understand corporate taxation whatsoever. Corporations pay income tax on profits, if they make less profit they pay less tax. Profits are either distributed to shareholders, paid out to employees, or reinvested in the business. There is no other place for profits to go. In the first two cases these are taxable events. If a corporation pays a shareholder or employee the shareholder or employee will be taxed. In come cases the employee will be taxed up to 52% of the payment. In neither case does the government forgo revenue.

The other possibility is that Wells Fargo decides to reinvest in its own business with its profits. This could actually decrease the take for the IRS. This leaves us with a question, who is in a better place to decide the wisdom of business investment, Wells Fargo or the US Congress? Certainly a good investment by Wells Fargo will generate more tax revenue in the future. An FDIC Bailout generates only spending by our Government and no new revenues.

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John Powers is the President of the Chicago Daily Observer