[Congressional Record Volume 158, Number 9 (Monday, January 23, 2012)]
[Senate]
[Page S45]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LEVIN:
  S. 2033. A bill to amend the Internal Revenue Code of 1986 to end the 
costly derivatives blended rate loophole, and for other purposes; to 
the Committee on Finance.
  Mr. LEVIN. Mr. President, the coming year is certain to be focused on 
two problems: the need to restore prosperity for American working 
families, and the need to reduce our budget deficit. Our challenge is 
to accomplish these goals together, and not to pursue one at the 
expense of the other. As I have said repeatedly to this Senate, I 
believe the only way we can successfully achieve both goals is to 
pursue deficit reduction strategies that do not rely solely on slashing 
federal spending and attacking programs that help build opportunity for 
the middle class. We must recognize that revenue, as well as spending 
cuts, must be part of our strategy, and we must ensure that the 
sacrifices that surely will be needed to reduce the deficit fall not 
just on middle-class Americans, but are spread equitably, and ask for 
contributions from those who have benefitted so greatly from policies 
enacted in the past.
  Today I introduce the Closing the Derivatives Blended Rate Loophole 
Act. This bill meets the twin tests of helping to reduce the deficit 
while promoting the interests of American families. It would put an end 
to a tax loophole that epitomizes how our tax code too often favors 
short-term speculation over investment in economic growth and job 
creation. This loophole showers benefits on short-term traders of 
certain financial instruments, but does nothing to promote economic 
growth and raises the tax burden on American families.
  What is the derivatives blended rate? It's an example of how the 
complexities of the tax code can grant breaks for the few at the 
expense of the many. Here is how it works.
  Generally speaking, taxpayers are allowed to claim the lower long-
term capital gains tax rate on earnings only if those earnings come 
from the sale of assets that they have held for more than a year. The 
reason is simple: we tax longterm capital gains at a lower rate because 
we want to encourage the long-term investment that helps our economy 
grow.
  But under Section 1256 of the Internal Revenue Code, traders in 
certain derivatives contracts have managed to win themselves an 
exemption from the distinction between short-term and long-term capital 
gains. Under this section, traders in those derivatives can claim 60 
percent of their income as long-term capital gains, no matter how 
briefly they hold the asset. This ``blended'' tax rate applies if the 
trader holds the asset for 11 months or 11 hours.
  The details may be complex, but the bottom line is that this 
treatment bestows a substantial tax break on those who typically hold 
the covered derivatives for only a brief period. It encourages and 
rewards short-term speculation in complicated financial products and 
does little, if anything, to help our economy grow and create jobs. In 
fact, the increasing focus of our financial markets on short-term 
profit through trades that last just minutes or seconds threatens real 
damage to our economy. This speculation is hardly the sort of activity 
that our tax code should subsidize.
  We also lose significant tax revenue by allowing this tax break--a 
revenue loss that means we must either ask for more from American 
families, or add to the deficit. What's more, this misguided policy 
contributes to the basic unfairness that characterizes too much of our 
tax code, by providing an unusual and unnecessary tax break to a small 
group of financial speculators. Instead of encouraging growth and 
investment, these loopholes contribute to what Warren Buffett has 
called the ``coddling'' of the wealthy and well-placed.
  Closing this loophole is a common-sense, mainstream idea. I ask my 
colleagues to heed the advice of the tax experts at the American Bar 
Association's Tax Section, who wrote in December to the tax-writing 
committees of the House and Senate:

       We are aware of no policy reason to provide preferential 
     treatment for these gains and losses. Lower capital gains 
     rates are intended to encourage long-term investments in 
     capital assets such as stock. Whatever the merits of 
     extending preferential rates to derivative financial 
     instruments generally, we do not believe that there is a 
     policy basis for providing those preferential rates to 
     taxpayers who have not made such long-term investments.

  Ending this loophole by passage of the Closing the Derivatives 
Blended Rate Loophole Act would not solve all the problems in our tax 
code, nor end our deficit dilemma. But it would be another important 
step toward a saner, fairer tax code. It would demonstrate that 
Congress shares the concerns of so many Americans that the tax system 
is too often stacked against the interests of working families and in 
favor of the privileged few. It would end a policy that encourages 
short-term speculation over long-term investment in growth. It would 
provide a down-payment on the revenue we need to restore if we are to 
engage in serious deficit reduction and avoid slashing critical 
programs. I urge my colleagues to join me in the effort to pass it.
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