Is US tax law accidentally favoring sovereign wealth funds, giving them an advantage over other investors? Law professor Victor Fleischer says that is exactly what is happening, and advises Congress to amend the tax-code to repeal the loophole that sovereign wealth funds are exploiting.
Fleischer gained attention last year when his paper about the tax treatment of private equity, titled Two and Twenty, caught the eye of Capitol Hill lawmakers and made carried-interest front page news. His latest research paper proposes that allowing sovereign wealth funds to remain exempt from taxes on the principal of sovereign immunity favors sovereign wealth funds over private foreign individuals and funds.
“Encouraging foreign investment in the United States generally increases overall welfare,” he writes on the Congolmerate. “But there is no sound policy reason to unconditionally exempt state-owned investment funds from U.S. taxation, and it is not at all clear that we should give state-owned funds a competitive advantage that crowds out private investment.”
He warns, however, that hasty action to raise taxes on sovereign wealth funds “could be perceived as a protectionist signal that could discourage both state-owned and private foreign investment.” That prediction is hardly outlandish. Already there are many on Capitol Hill who view with suspicion the recent investments in US financial firms by sovereign wealth funds.
Taxing Sovereign Wealth Funds [The Conglomerate]
Posted by Lowly Assistant , Mar 04, 2008 4:18PM
You've found your niche. Tax and politics will make the traffic explode (and may even cause a few "hard-nosed" skeptics to purchase those cute animal-icons advertised above "Most Commented").
Posted by guest , Mar 04, 2008 4:28PM
The traffic also explodes when the talk turns to S-E-X. Who can forget the series on boy toys looking for rich ladies that introduced us to Tanner. Whose pic I downloaded before it was redacted and which I bring up sometimes during those late late nights at work when EVERYTHING is turning slowly to shit. It cheers me up instantly. Unlike all this talk of politics and taxes, which is boring. More smut please. GAnalYst
Posted by diablo , Mar 04, 2008 4:34PM
Why are foreign governments welcomed to invest in financial institutions, but is so wrong for the US government to do the same? I see tax exemption as a form of the US taxpayer subsidizing the foreign governments investments. Isn't this some crazy distortion of moral hazard? Let the US taxpayer own a chunk of the banks also as long as the banks are subject to more regulation and there is jail time for the perpetrators of the current credit markets debacle.
Finally, there's no way that we can prevent more US assets going into the hands of foreign creditors. The US has massive debt and account deficit and on top of that a depreciating currency. One way or another the transfer of assets to the creditors will have to happen. And this time it will not be like the Japanese investing in inflated real estate during the previous bubble; this time strategic assets will be on the table with a "for sale" sign.
Posted by guest , Mar 04, 2008 4:35PM
I believe the way it works is that Carney writes about the serious tuff and Bess dishes out the smut.
Just my $0.02.
Posted by guest , Mar 04, 2008 4:37PM
@4:35 Sounds right, but unfortunately it seems like Bess is writing less and Carney more. GAnalYst
Posted by Anal_yst , Mar 04, 2008 4:46PM
anyone check for recent instances of bess' adulterous Gawker postings?
Posted by guest , Mar 04, 2008 5:05PM
It is almost amusing that, the USA government invests in places that the Mid- East Sovereign wealth funds wouldn't touch (non HAMAS palastinians)but are not "allowed" to invest in their own banks.
Hey maybe we can get George Bush to beg the Saudi's to add more oil production, again .....
Posted by Matt_m , Mar 04, 2008 5:21PM
Why is it that everytime they figure out that someone is paying less tax than the other, the solution is ALWAYS to equalize taxes for both at the HIGHER end?
Wouldn't it be more logical if they increased the taxed for one and reduced it for the other to maintain revenue neutrality? Dont that have to come up with some concrete proposal for spending the extra dollars before they can grab those extra dollars?
@4:34 says - "US taxpayer subsidizing the foreign governments investments."
So if I do not come and take some money from you, am I 'subsidizing' you?
Posted by guest , Mar 04, 2008 9:26PM
The exempt status of the SWFs originates from the War Tax Act, enacted after the US entered World War I. The idea was that allied goverments could co-invest in the US war machinery production without being taxed. This industry at the time needed lots and lots of cash and hence the stimulus.
Today, its in still around in code section 892.
It’s a brilliant provision.
To qualify for the exemption, the SWF needs to be passive - it cannot even run a hot dog stand. All deals are structured on this "passive" basis - look at the prepaid equity deals at Citi and ML; its all loans to prefs.
Think about that.
Got it? Its capital without control.
It’s brilliant. As long as old Crabhands, the Prince at 9 W 57th and their equiteer buddies, whom now are raising cash from these deep pockets, stay loyal to the cause there's nothing to worry about.
If these SWF managers were real smart, they'd be on the Street. They ain't - and are being happy splashy and comfortable in their desserts and boring city states. Worse still, they believe their financial prowess -- rather than talent -- allows them to be arrogant. Hence these dudes will get slaughtered, just like the Japanese in the mid 1990s.
Son of Gordon
Posted by guest , Mar 04, 2008 10:06PM
@ 9:26,
Pebble Beach anyone? We just need to make our currency cheap enough people will agree to buy our crap cheap before we raise the cost back up again... I remember when Japan was the largest Economy in the world...
Whoops that was a joke...