Tags: Derivatives, taxes, Victor Fleischer
In general when something is headlined “A Sensible Change in Taxing Derivatives,” or “A Sensible Anything,” that’s a good sign that it’s not; things that are sensible don’t have to advertise. Also: ooh derivatives are evil ooh, so the odds are even worse. But this particular sensible change – a Victor Fleischer DealBook column about a Republican House proposal to tax derivatives on a mark-to-market rather than “open transaction” basis – is more sensible than you might initially expect; it’s mostly plausible and inoffensive and non-pitchforky.1 (The idea is straightforward: if you own a derivative, and it went up in value this year, you pay taxes on the increase in value. Unlike with, say, stock, where you only pay taxes on the increase in value when you sell the stock.)
One way to tell it’s not too bad is that various reports suggest that the Wall Street reaction so far has been “meh?” or “huh?”; this is presumably in part because it’s not clear how real this is and in part because it’s not clear how bad it’d be if it was real. Wall Street, in the sense of derivatives dealers, already pay taxes on their derivatives inventory on a mark-to-market basis, so the dealers’ dog in this fight is not their own taxes but rather the marketability of various products, from boring ETNs to lovely variable share forwards, to customers focused on tax efficiency.
Nonetheless! There are two ways to think of derivatives. One is they are a specific class of evil things, often involving acronyms, designed to let banksters get up to dirty tricks. This line of thinking goes along with words like “complex” and “opaque” – “derivatives are complex instruments …” etc.
The other way to think of the term is as a catch-all for any sort of contract whose value is determined in part by something in the world. Read more »
Tags: Compensation, Goldman Sachs, investment banks, Mervyn King, taxes
Here is an important cultural difference between the US and the UK that you should, like, stick in the boot of your lorry or whatever: in the UK, it’s apparently not socially acceptable to put off paying bonuses by two months to save your employees five percentage points in taxes. In America, it’s considered perfectly reasonable to die to avoid a tax increase.1
I was not aware of this difference and it seems neither was Goldman Sachs:
Goldman Sachs has backed down from a plan to delay UK bonus payments until after the new UK tax year, which would have allowed bankers to benefit from a cut in the top rate of tax from 50 to 45 per cent. … The idea – first reported by the Financial Times on Sunday – would have seen the payment of the deferred portion of bonuses from prior years delayed from February until after April 6.
News of the plan prompted a flurry of criticism from lawmakers and even from within the banking industry.
Addressing the House of Commons Treasury select committee earlier on Tuesday, Sir Mervyn King, governor of the Bank of England, had criticised the idea.
“I find it a bit depressing that people who earn so much find it would be even more exciting to adjust their payouts to benefit from the tax rate, knowing that this must have an impact on the rest of society, which is suffering most from the consequences of the financial crisis,” Sir Mervyn told MPs. “I think it would be rather clumsy and lacking in care and attention to how other people might react. And in the long run, financial institutions do depend on goodwill from society,” he added.
You can sympathize with Goldman’s misunderstanding here, no? Read more »
Tags: AQR, Cliff Asness, drum circles, middle class, rewards for legal and illegal tax avoidance, taxes
“The only way to finance a big European-style state is to have it paid for by massive taxation of everyone, mostly the middle class. Right now, we are avoiding honest debate on this fact…The first truth is that the current tax rates cannot support the promises made to middle-class Americans. The most unaffordable items in fiscal projections are Social Security for everyone and government-sponsored health care for the middle class. You cannot preserve these even with Draconian slashing of military, infrastructure, welfare, education, and other expenditures. The second truth is that you cannot pay for the Life of Julia, or any vision of a cradle-to-grave welfare state, without massive and increasingly regressive middle-class taxes. The poor don’t have the money to pay for a European-style welfare state, and the rich, rich as they are, don’t have anywhere near enough. Not only that, it’s easy to tax middle-class assets and transactions — things like payrolls, sales, and real estate — but soaking the rich means taxing investments. Investments are complicated and can be restructured to minimize taxes. Also, investments are the lifeblood of economic growth. Raising significantly more taxes from the rich also requires higher marginal tax rates — and their rates are already quite high. High marginal rates distort the economy and yield less revenue than anticipated because they increase the rewards for legal and illegal tax avoidance…to achieve anything like the European-style entitlement state they advocate, we need to tax everyone a lot more, not just the 1 percent. Despite all the drum circles protesting the inequitable distribution of resources, the wealthy just don’t have enough. The middle class and even the poor must step up to carry more of the burden if this is our desired endgame.” [The American via Heidi Moore, related]
Tags: David Bonderman, Private Equity, taxes
I feel like this came out wrong:
The idea that capital gains treatment should only be available to those with money to invest would advance a policy that puts a higher value on financial contributions than vision, hard work and other forms of sweat equity.
That’s from Steve Judge, president of the Private Equity Growth Capital Council, and I think he just said “the idea that capital gains treatment should only be for gains to capital is unfair to people who earn their income from labor,” and, I mean, that’s certainly a position you can have, but … I dunno, that’s not how I’d argue for taxing my labor at a lower rate than other people’s labor?1
It’s from this very funny FT article about the incidence of changes to private-equity taxation. Basically you can just about imagine, if you have an overactive imagination, that a second Obama term would bring changes to the tax treatment of carried interest so that the 20 in private equity’s 2-and-20 would be taxed as ordinary income (35%) instead of capital gains (15%). As with any tax on a business it’s worth asking who actually pays it, and one possible answer is “well, if we amend our partnership agreements to require LPs to gross up managers for any change in the tax code, then the LPs will pay it, won’t they.” That answer turns out to be (1) something that people have actually tried and (2) wrong: Read more »
Tags: Chesapeake Energy, taxes
If you were at, say, Range Resources, wouldn’t you be SO PISSED at Chesapeake? Uniquely in modern memory, every media report during Chesapeake’s meltdown has had immediate and dire results. Aubrey’s a bit of a scoundrel? Strip him of his chairmanship. His founder participation program creates conflicts of interest? Terminate it. There was maybe a bit of collusion in bidding on some mineral leases? Why hello DOJ antitrust probe.
Bloomberg dug up another mini outrage today with its discovery that Chesapeake doesn’t pay taxes much, mostly because it spends much much more money than it takes in:
Chesapeake Energy Corp. (CHK) made $5.5 billion in pretax profits since its founding more than two decades ago. So far, the second-largest U.S. natural-gas producer has paid income taxes on almost none of it.
Chesapeake paid $53 million over its 23-year history, or about 1 percent of the cumulative pretax profits during that period, data compiled by Bloomberg show. … The biggest tax break, for Chesapeake and other independent U.S. oil and gas companies, is a rule that’s been around since at least 1916 that allows some producers to expense “intangible drilling costs.” Companies can count most of the cost of boring a new well against their taxes at the time the money’s spent, rather than recognizing it over several years. That allows them to effectively put off tax payments, even during years when they turn a profit.
This is a story about the mismatch between tax and GAAP accounting, which is a story that is as old as time; one question you could ask is, which is right? Read more »
Tags: Harbinger Capital, Harbinger Capital Partners, hedge fund managers, Phil Falcone, taxes, that's gonna leave a mark, Wilbur Falcone
Remember the time Harbinger Capital Partners founder Phil Falcone was a little short on cash, and decided to “borrow” $113 million from a fund in which redemptions had been suspended in order to pay personal taxes, which he later begrudgingly apologized for? Unfortunately for Big P, the SEC does. (The regulator also recalls he time he allegedly played favorites with Goldman and allegedly manipulated some markets.) Read more »
Tags: CFTC, OneChicago, Royal Bank of Canada, sort of scammy, taxes
Okay one more from the recent CFTC trilogy: what is up with RBC? Is it the strangest of them all? I’m pretty sure I haven’t earned the right to have an opinion on that, or even a theory, but I have some questions.
One is: what was the scam here? I mean, here was the scam:
(1) RBC buys or owns stocks whose dividends are deductible for Canadian tax purposes,
(2) RBC hedges those stocks by selling single stock futures or narrow-based index futures to other bits of itself,
(3) So RBC is flat, gets the div one way and pays it the other, but gets a tax benefit from the div it gets and also presumably a deduction on the div it pays, so its net position is zero + tax benefit,
(4) EXCEPT that the bit of it that owns the stock and is short the future is flat but the bit of it that bought the future is, of course, long, so summing over all of its bits RBC is still long the stock, which is a part of this that confuses me, though not the only one,*
(5) anyway though the trades were arranged between bits of RBC rather than competitively bid,
(6) but then they memorialized them by printing them to the OneChicago exchange overseen by the CME and the CFTC,
(7) which created misleading prints because they were non-competitively-priced wash sales instead of real market trades between arms’-length counterparties,
(8) so the CFTC sued.
So, sure, I’ll go along … that sounds sort of scammy. But one thing that is weird is that OneChicago as far as I can tell is just a market for memorializing your privately negotiated trades. RBC was trading narrow-based index futures on OneChicago. Here is what OneChicago has to say about those: Read more »