[Congressional Record Volume 157, Number 139 (Monday, September 19, 2011)]
[Senate]
[Pages S5709-S5710]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      REDUCING THE BUDGET DEFICIT

  Mr. LEVIN. Mr. President, I wish today to discuss two more ways to 
reduce the budget deficit by eliminating tax loopholes and special tax 
breaks and restoring fairness to the Tax Code while protecting 
essential programs for American families.
  Last week I sent a letter to members of the Joint Select Committee on 
Deficit Reduction outlining a 7-point plan that could lower the deficit 
by $1 trillion over 10 years through some restored revenues. I spoke 
last week on the floor about the necessity of addressing revenue, not 
just spending cuts, to achieve real deficit reduction. I discussed in 
some detail two of the proposals in my plan, which are combating 
offshore tax haven abuse and eliminating the tax loophole that forces 
taxpayers to subsidize stock option compensation for corporate 
executives.
  Since I spoke last week, President Obama has outlined his ideas for 
deficit reduction. Significantly, the President has embraced the need 
to restore significant revenues to reduce the deficit. I believe the 
President's proposals are an important step toward serious deficit 
reduction. Indeed, some of his ideas parallel the proposals which I 
have made to the joint select committee.
  Today I wish to outline and describe two more of my proposals, each 
dealing with a tax loophole that benefits Wall Street at the expense of 
working families and our fiscal well-being. One would end the carried 
interest loophole that allows hedge fund managers to pay the lower 
capital gains tax rate on their pay for managing investments. The 
second would end the blended rate loophole that gives preferential 
status

[[Page S5710]]

to income from derivatives trading even in the case of derivatives held 
for seconds or minutes. That preferred status is given over the kinds 
of long-term investments that are more important in helping put capital 
to work, growing the economy, and creating jobs.

  Each of these two loopholes amounts to a subsidy. Working American 
families who pay their taxes every year end up carrying an extra burden 
because these provisions allowed Wall Street to pay a lower tax rate 
and the rate applied to average workers. I cannot see how anybody can 
explain to working Americans that they must bear a greater tax burden 
so hedge fund managers get a tax break on pay that often amounts to 
millions of dollars a year or so that speculative traders can pay a 
lower tax rate on so-called investments they might hold for just a few 
seconds.
  Let's first talk about the carried interest loophole. Hedge fund 
managers generally make their money by charging their clients two fees. 
First, the manager gets a management fee, typically 2 percent of the 
assets. Second, the manager typically gets 20 percent of the profits 
from those investments above a certain level. That 20 percent is known 
as carried interest and, under current law, hedge fund managers can 
treat that income as a long-term capital gain taxed at a maximum rate 
of 15 percent and not at the higher ordinary income rates.
  What is the blended rate loophole? Since 1981, those who trade in 
some financial products such as futures contracts and options have 
enjoyed a specially created tax loophole that allows them to pay a 
lower rate than, for example, traders who buy and sell stock. No matter 
how long a speculator holds on to a futures or options contract--again, 
even if it is a few seconds--their gains and losses are taxed at a 
lower so-called blended rate; that is, part at the capital gains rate 
and part as ordinary income. So a dealer who buys a stock and sells it 
within a year must pay taxes at the ordinary income rate, while that 
same dealer who buys an option and sells it 30 seconds later gets to 
pay the lower capital gains rate on most of that income.
  These special tax breaks impose an unfair burden on American 
taxpayers, and they contribute significantly to the budget deficit. 
Based on estimates from the Joint Committee on Taxation, eliminating 
the carried interest loophole could reduce the deficit by $20 billion 
or more over 10 years. The Joint Committee has made no estimates of the 
cost to the Treasury of the blended rate loophole, but it is reasonable 
to assume that ending it would reduce the deficit by billions of 
dollars.
  Beyond their fiscal impact, these proposals would help restore 
fairness to the Tax Code. These tax subsidies give preference to 
activities that do not contribute much to economic growth or job 
creation the way other activities that don't enjoy the same subsidies 
do. Instead, they subsidize hedge fund managers and derivative dealers.
  Take the carried interest loophole again for a moment. We tax income 
that investors receive from hedge funds and other investments at the 
lower capital gains rate because, in theory at least, those investments 
help put capital to work, creating jobs and growing the economy. But 
the hedge fund manager isn't putting his own capital at risk; he is 
just doing his job, the same as his employees or the janitor who cleans 
his office at night. This tax break doesn't reward risk taking or job 
creation; it rewards what is already an extremely lucrative profession. 
According to a survey by a magazine covering the hedge fund industry, 
the top 10 hedge fund managers last year each made at least $440 
million. Six made more than $1 billion in 1 year. It is hard to imagine 
that we need to offer a tax break to encourage people to become hedge 
fund managers.
  Similarly, the derivatives blended-rate loophole doesn't just add to 
the deficit, it is plainly unfair. It is unfair not only to working 
Americans who have to pay higher tax rates than these derivative 
traders, it is also unfair to investors who risk their capital and 
long-term stock and other investments that are more important to job 
creation but don't enjoy that same tax break. This loophole gives 
preferential treatment to short-term, speculative trades over long-
term, patient capital, and that is exactly the wrong message to send.
  We should end these Wall Street loopholes. I have encouraged the 
members of the joint select committee to end them. We should end them 
because they add to the deficit, because they subsidize activity that 
does not need a subsidy and that does not add much to economic growth, 
and because they are unfair to the millions of American taxpayers who 
do not enjoy the same tax breaks and have to pay more in taxes to make 
up for these unfair subsidies. Eliminating them would be good for our 
economy. It would enable us to reduce the deficit by billions of 
dollars a year. It would help us fund important programs that protect 
seniors and children, programs that make our Nation stronger.

  So I hope the joint select committee will look hard at these and 
other proposals in my plan as they carry out their difficult task. I 
will be back again in the next few days to discuss three more ideas 
that can reduce the deficit, protect the middle class, and avoid 
Draconian cuts in vital programs.
  I thank the Acting President pro tempore and yield the floor.
  I suggest the absence of a quorum.
  The ACTING PRESIDENT pro tempore. The clerk will call the roll.
  The bill clerk proceeded to call the roll.
  Mr. JOHANNS. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The ACTING PRESIDENT pro tempore. Without objection, it is so 
ordered.

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