Draft legislation to change the taxation of financial instruments was released on January 24 by House Ways and Means Chairman Dave Camp, R-Mich. The proposal is intended to generate comments from the financial services industry with the end goal of producing comprehensive tax reform later in 2013. The legislation, including a detailed provision to require the yearly mark-to-market tax treatment of financial derivatives, was not drafted as a way to generate new federal tax revenues, according to a committee staffer who spoke on background.
Generating a revenue score on the legislation would not be relevant, or entirely possible at this point, since it is intended as part of comprehensive legislation that will lower both corporate and individual tax rates, the staffer said. Those rates are still not set and will likely not be unveiled until the entire legislative package is introduced. In a statement released with the draft, Camp said that he wants feedback from the public. “If we are to enact tax reform that preserves needed flexibility in the financial markets while ensuring that no one is gaming the system and putting hardworking taxpayers at risk, then we will need the expertise of those who are most familiar with these products,” he said.
Camp said the tax code needs to be updated to reflect recent financial innovations on Wall Street. An updated code and tax regulations might have shortened the length of the great recession in 2008, which was caused, in part, by abuse of derivatives and other exotic financial instruments, the staffer said. The financial products tax reform draft follows a similar international tax reform draft released in 2011.
Ways and Means ranking member Sander Levin, D-Mich., released a brief statement about the Camp proposals, calling them interesting ideas that might raise revenues. “This underlines the need for us to act on a bipartisan basis to raise revenues and close loopholes as we seek further deficit reduction through a balanced package of spending cuts and additional revenues,” Levin said.
The draft legislation also includes provisions to simplify business hedging tax rules, eliminate the tax on income resulting from cancellation of debt and harmonize the tax treatment of bonds traded at a discount or premium on the secondary market. The legislation would also increase the accuracy of determining gains or losses on the sale of securities and prevent the harvesting of tax losses on securities.
By Stephen K. Cooper, CCH News Staff