Tax Loopholes

We believe that the state and nation could solved some of our financial difficulties by re-examining the various tax codes. Writing in the DealBook Column of the New York Times, Andrew Ross Sorkin offers “An Addition to the List of Tax Loopholes.”

Here’s another little-known group of tax code beneficiaries that he might want to add to the list: day traders and speculators who buy and sell futures contracts.

For years, futures contracts, which are essentially bets on the price of commodities, stock indexes and the like, have received a more favorable tax treatment than stocks. A trader who buys and sells an oil contract in less than a year — even in a matter of minutes — pays no more than a 23 percent tax on the profits.

Compare that with the bill for flipping shares of Google, General Electric or even a diversified mutual fund in the same time period. Those short-term investment gains are treated like ordinary income, meaning the rate can run as high as 35 percent.

“There are so many ways to attack the logic of it,” Warren E. Buffett, the chairman of Berkshire Hathaway, said in an interview on Monday about of the futures tax break. “It doesn’t make sense.”

What does the tax loophole cost the federal government? Each year, the United States gives up roughly $2 billion in lost revenue, according to the Congressional Research Service, a federal agency.

That number may seem insignificant against the backdrop of the country’s $55 trillion state and local government debt, and federal debt which stands at about $14 trillion. But tax inequities like this start to add up when considered collectively. Based on data from the Office of Management and Budget, the United States could put another $20 billion in its coffers over 10 years if it taxed the investment gains of hedge funds and private equity executives as ordinary income. The so-called carried interest is treated like capital gains, which is taxed at a much lower rate. The corporate jet break amounts to about $2 billion to $3 billion in a decade.

Perhaps the tax break on futures contracts wouldn’t be so irksome if it simply helped farmers protecting the value of their corn crops, airlines dealing with the rising cost of oil or even individuals hedging the risks in their portfolio.

But the biggest beneficiaries seem to be day traders and speculators. Long-term investors account for only 20 percent of the activity in the commodities future market, according to a report published last week by the Commodity Futures Trading Commission, the industry regulator.

When I called Robert Green, a tax specialist whose clients include traders on the Chicago Mercantile Exchange, the hub of commodities futures contracts, he seemed genuinely taken aback.

“I’ve been dreading getting a call like this,” he said, apparently worried that any publicity of the tax break could put pressure on lawmakers to revisit the rule. “No one has shot something across the bow.”

The rest of the article is here.