July 10,2008

Grassley: House Extenders Bill Offers Hedge Fund Mangers’ Offshore Loophole

Floor Statement of Senator Chuck Grassley:
Offshore Deferred Compensation and Tax Extenders Bill
Delivered Thursday, July 10, 2008

A series of correspondence has gone back and forth between the Republican and Democraticleadership regarding the extension of expiring tax provisions and energy tax incentives.

On July 3, Leader McConnell sent a letter to the Majority Leader, urging that he work with us tofind areas of bipartisan agreement in order to break the current impasse over extending these timesensitive provisions.

On that day, the Majority Leader responded in a sharp manner. Here’s his quote: “While I ampleased that Republicans appear to have abandoned their fiscally irresponsible ways when it comesto the extenders bill, it is hard to comprehend why Senators McConnell and Grassley would chooseto cut programs to help working families, seniors, and veterans in need of health care in Kentuckyand Iowa in an effort to protect multinational corporations and hedge fund managers.”

On a preliminary point, in all the back and forth on this, I have not criticized the Majority Leaderby name. In the tension that comes in Senate debate in a political environment, I think it best to stickwith that course. I’m disappointed the Majority Leader didn’t keep the discussion on that level.With all due respect to the Majority Leader, he seems to have misread this letter. I’d like to set therecord straight on a couple of important points.

First, simple extensions of expiring tax relief, including an extension of the AMT patch, should notbe offset with accompanying tax increases. This does not mean that we are opposed to offsettingthe revenue lost from new tax relief policy with spending reductions or revenue raised from taxproposals that are grounded in good tax policy.

That brings me to the second point. The distinguished Majority Leader accused Leader McConnelland me of protecting hedge fund managers. This is simply not the case.

In fact, the House extenders bill contains an offshore deferred compensation proposal. This proposalthat the Democrats actually support allows these same hedge fund managers a very generous taxbreak that is not available to the average taxpayer.

The House-passed hedge fund proposal allows these hedge fund managers to avoid paying tax ontheir offshore deferred compensation if they make a cash donation to charity equal to 100 percentof the amount of the offshore deferred compensation. Meanwhile, the average taxpayer is limitedin how much they can deduct – even for contributions to charity. They can only deduct charitablecontributions if those contributions don’t exceed 50% of their adjusted gross income.

So, if a teacher donated his or her entire salary to a charity, he or she would only be able to claimabout half of that as a deduction. Meanwhile, a hedge fund manager who sheltered income in theGrand Caymans would be allowed to claim a deduction for the entire amount of his or her shelteredincome.

So I want to be clear. Not only do I support the policy of changing the tax treatment of off-shoredeferred compensation for hedge fund managers, but I’d also make sure we corrected the giantloophole in the House bill that benefits hedge fund managers. We should make sure that if we’regoing to tax the deferred income, we don’t leave an escape hatch in the future.

With respect to the spending cut allegation, the Majority Leader’s comments, again with all duerespect, imply he has not read the Republican Leader’s letter correctly.

The Republican Leader’s offer to break the stalemate does not pit spending cuts for benefits forworking families, seniors, and veterans against expired tax relief provisions. The spending describedin the letter is for unspecified and unwritten appropriations bills as far as 10 years in the future. Thegeneral spending account identified represents the excess of new future spending levels over currentlaw levels for non-defense discretionary spending plus inflation. None of the current law levels ofthese categories of spending would be cut. What’s more, the Republican Leader’s offer would leaveintact nearly all of the $350 billion in new extra spending. On its face, it is an extremely modestrevision of this extra spending. I ask unanimous consent to place in the record copies of theRepublican Leader’s letter and the Majority Leader’s response.

To put the matter in some perspective, I ask unanimous consent to place in the record an articlecontaining a summary of an analysis by noted economist Kevin Hassett, a senior fellow and directorof economic policy at the American Enterprise Institute (“AEI”). According to the analysis, if thelast Clinton Administration budget were the baseline, Federal spending would be $400 billion lessthan it is this fiscal year. Dr. Hassett’s analysis accounts for spending increases for the Global Waron Terror and related matters that were anticipated at the end of the Clinton Administration. Theanalysis shows that other government spending is trending $400 billion above where it otherwisewould be.

In essence, the Republican Leader’s offered offset category is future undefined spending budget“room” that did not materialize until the conference report on the budget was adopted a few weeksago. Keep in mind that this new, undefined future spending sits on top of a baseline that is, as Dr.Hassett’s analysis shows, $400 billion higher than the trend-line from the last ClintonAdministration.

If the Majority Leader does not engage us on this deficit neutral offer, then he is putting taxpayersin Nevada at risk for the loss of several deductions they used on tax returns for last year. Includedare the state sales tax deduction, college tuition deduction, and teachers' classroom expensededuction. The latest IRS Statistics of Income data on the number of families and individualsclaiming these benefits for the states of Nevada, Kentucky, and Iowa will appear in the record aftermy discussion.

The tradeoff is clear. Deal with these tax benefits which affect taxpayers now. Offset them with anundefined extra spending account for appropriations bills that won't be written for several years fromnow. All of that can be accomplished without adding a penny to the Federal deficit.

I yield the floor.

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