Victor Fleischer

  • 07 Feb 2013 at 7:13 PM

If You Tax Derivatives, Only Derivatives Will Pay Taxes

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 »

Taxing Sovereign Wealth Funds

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]