Friday, June 04, 2010

Senators defend hedge fund perks in the name of the poor; minorities; cancer patients

Citizens for Tax Justice in Washington has been writing powerfully around a piece of legislation known as HR 4213 (known as the "extenders" bill because it would extend several
economic relief programs and small tax breaks) that was approved by the House of Representatives last week, but only after conservative Democrats severely weakened it (see here for explanations of the tax loopholes the bill potentially closes). The U.S. Senate, however, went home for the Memorial Day recess without acting on this bill, which resulted in the expiration of unemployment insurance and health benefits for out-of-work families.

"One problem all along was that many members of the Senate expressed reservations about a provision in the bill to clamp down on an unfair loophole for investment fund managers.
. . .
“Carried interest” is a portion of profits promised to certain people who manage investment funds. The “carried interest” loophole allows these fund managers to pretend that some of this compensation is actually capital gains, which is taxed at a top rate of 15 percent and not subject to payroll taxes, whereas wage compensation is generally taxed at a top rate of 35 percent and is always subject to payroll taxes. The end result is that these investment managers (who sometimes earn hundreds of millions of dollars in a year) can pay taxes at lower rates than their secretaries."

Now the lobbyists are parading outrageous arguments in defence of the loophole for the wealthy. Here is one example:

"One of the most ludicrous arguments that some Senate staffers have apparently accepted from real estate lobbyists. It goes something like this. First, taxing investment fund managers at the low capital gains rate (instead of the ordinary income tax rates that everyone else pays on their compensation) is good because it encourages risk-taking by investors. Why risky investments are good is never explained.3 This argument also ignores the fact that the people putting up the money are completely unaffected whether this loophole exists or not. (Closing this loophole will only affect the carried interest paid to a person in return for managing someone else’s money.)

Or another one:

"Their argument is that helping low-income neighborhoods does not require lower taxes for the teachers, police officers, or the construction workers who build these communities everyday, and it doesn’t even require lower taxes for the people who actually put up the money to invest in these communities. It requires, more than any of this, lower taxes for the people who manage the money being invested — no matter how many millions of dollars they earn."

There is plenty more in this excellent CTJ report, such as an argument that this loophole protects minorities and cancer patients. CTJ, as usual, cuts straight to the heart of the matter.

"The arguments made by investment fund managers in defense of the carried interest tax loophole are outlandish. The only question left is why exactly Senators and their staffs are willing to parrot these arguments. Surely, the persuasiveness of these arguments is not the reason, because they fail to meet a basic threshold for reasonableness even by Congressional standards. For most observers, the only possible reason is the oldest one — money."

If the consequences were not so horrendous, this would be a comedy.

The bill also contains some important defences against offshore abuse, notably in the area of foreign tax credits. The aim of foreign tax credits is to prevent income being taxed twice (first overseas, and then in the U.S.) But what corporations and their lobbyists have been able to do is to defer its taxes on offshore income, as long as this income is not repatriated to the U.S. But some U.S. companies have found ways to have it both ways, so that they defer U.S. taxes on foreign income even while they take foreign tax credits for the foreign taxes paid on that income. This obviously has nothing to do with preventing double taxation.

Read more on those shenanigans here. HR 4213 aims to close these loopholes, raising $14 billion over 10 years.


Blogger Guava said...

Very nice article.. i like it!

2:31 am  

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