Thursday, September 5, 2013
Thomas J. Brennan (Northwestern), Perils of Partial Mark-to-Market Taxation:
As part of its proposal for comprehensive tax reform, the House Ways and Means Committee has suggested mark-to-market taxation for derivatives, but apparently not for the underlying assets. Such a partial mark-to-market system would create opportunities for investors to have negative effective tax rates and thereby extract billions of dollars from the U.S. Treasury on an annual basis. I explain the nature of such strategies, develop the underlying theory, and provide specific empirical examples of how they would have worked if the proposed regime had been in place historically. I also describe revisions to the reform proposal that would address the concerns that I raise. In light of my findings, I suggest that Congress either abandon or substantially revise the current proposal.