•How should derivatives be taxed when one counterparty is outside the United States?
• What kinds of problems will arise when derivatives and the underlying are taxed in different ways, particularly when there’s such a
gulf between ordinary income rates and longterm capital gains rates?
• Might book tax conformity be the best solution, begun with book tax conformity for hedge identification?
Now I’m going to be devil’s advocate and say that a theory with unanimous support is probably wrong which is true of mark to market too. Markets are so imperfect — how do we declare a price before something is actually sold in an arm’s length transaction? Perhaps we should get rid of all tax fictions including interest expense accrual and depreciation and mark to market and stick to cash. That’s at least provable, findable, and objective. Or so we thought till Bitcoin was invented.
Some people in the Capitol are disappointed that Dave Camp didn’t introduce his draft Tax Reform Act of 2014 as an actual bill on the floor of the House of Representatives. Aren’t lawmakers supposed to enact laws? But in raising their eyebrows these observers have revealed Camp’s real achievement, and it isn’t in the words of the excruciatingly detailed reform he released as a mere Draft. It’s found in the singular title: Draft.
You have to admit it’s odd: the Ways and Means Committee isn’t normally in the role of think tank. Big ideas come from academics, from the President
and Treasury Department, from the tanks paid to think. But when Dave Camp became Chair of the Ways and Means Committee after 20 years in Congress, he had 4 years to redo the tax code and he would have to do it with whatever resources he alone had. The vision was his, alone.
And his achievement was making it a shared vision, using new methods. Mr. Camp is a litigator and he knows that to win you have to be the best prepared. He was a junior member on Ways and Means when welfare reform failed twice before it was signed by a Democratic President. Big ideas can’t just be thrown onto the floor of the House of Representatives with the prayer that they’ll stick.
Hiring a dedicated tax reform staff, and harnessing the skills and experience of the House Legislation Counsel and the Joint Committee on Taxation, Camp began the journey to the thousand pages of reform, with three goals: reducing rates, while keeping distribution and revenue-neutral. It was an almost impossible task.
But it happened: Mr. Camp has released a complete tax reform package, including legislative language, revenue tables, and technical explanation. I don’t think any chair of the Ways and Means Committee has invested so many resources in such a manner, without any promises of support from the White House or Congress. People down the Hill call to tell me (in the secret of course) that if the financial products Draft were enacted into law tomorrow it would work, and better than the law does today. It’s not high praise perhaps: the law today sets a low standard.5
Throughout the process of creating his Draft, Mr. Camp listened to the ideas of anyone who believed in tax reform. Regularly briefing the members of his Committee, he took on the role of educator — explaining the trade-offs and reminding everyone that to reach good goals, there had to be sacrificed. In the several hearings held before the final release, Members and stakeholders observed the working out of the hard decisions needed for reform.
And in the final product, we got to see the tax law as it might be, before the mark-ups and the battles in Committee. For now, it will sit, be observed, and improved upon
Already, people around the world are taking note. The United States has now written words to implement the acknowledged ideal for the taxation of derivatives. Antibiotics and personal computers and iPhones, and Google and Facebook were created in the United States and now we have the most
innovative model for the taxation of derivatives.
Well, not quite. It hasn’t gone to the Committees or the Chamber of the House of Representatives or the Senate or the White House.
Heard melodies are sweet, but those unheard
Are sweeter; therefore ye soft pipes play on.
John Keats
Ode on a Grecian Urn