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Tell the IRS: Stop hedge funds from dodging taxes

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    Tell the IRS: Stop hedge funds from dodging taxes

    The 25 richest hedge fund managers pocketed nearly $21 billion last year. That’s more than twice the annual income of all kindergarten teachers in America combined.1

    But unlike teachers and other working Americans, hedge funds aren’t paying their fair share of taxes. On top of the low tax rates on long-term capital gains that allow Warren Buffett to pay a lower tax rate than his secretary, and the infamous “carried interest” loophole, hedge funds have been setting up shell companies in tax havens to dodge millions in tax obligations.2

    The Internal Revenue Service (IRS) has the power to end tax evasion like this by deeming it “abusive,” but instead it has already bowed to industry pressure and proposed vague and unspecific rules.3 The IRS is only accepting public comments on the proposal until July 23, so we are teaming up with our friends at the American Federation of Teachers to make it clear that Americans demand tough action to end hedge funds’ tax avoidance.

    Tell the IRS: Stop hedge funds from dodging taxes.

    Hedge fund managers are among the worst of the 1%, buying and selling everything from securities to stocks, short-term bonds, and entire companies, all in the unbridled pursuit of profit. Hedge fund managers receive a flat fee of 2% of their entire holdings, and then another 20% of all gains. They exploit all manner of tax loopholes to rake in millions each year, and many then turn around and use their hoarded wealth to buy political power, attempt to privatize and profit off government services, or fund right-wing causes.4,5

    Here’s how this tax-dodging scheme works: Hedge funds are able to dodge taxes by moving money through tax shelters to take advantage of different tax rates. For instance, regular income, like a salary, is taxed at one rate. Long-term capital gains, the profits from buying and selling financial products, are taxed at a far lower rate, in order to incentivize people to invest for the future.

    Hedge funds set up reinsurance companies – corporations that sell insurance to insurance companies – in tax shelters like the Cayman Islands. These phony companies either have no employees or share staff with the hedge fund, and do a bare minimum of real business. Then the hedge fund takes income and transfers it to the reinsurance company, which in turn invests in the hedge fund. The reinsurance company only pays taxes when the fund is sold, much later, and at the lower tax rate.6,7 Income “magically” becomes long-term capital gains, without ever leaving the hedge fund. It’s a scam, pure and simple.

    Tell the IRS: Stop hedge funds from dodging taxes.

    The proposed IRS rules don’t do enough to stop this behavior. The IRS could have clearly distinguished between real reinsurance companies and phony tax dodges, or used its authority to close the loophole altogether. Instead, the draft rules are vague, unspecific, and an invitation for hedge funds to find new loopholes to abuse the system.8

    Financial lobbyists and power players count on Americans not paying attention to rules like this one. They twist arms and use their influence to weaken laws before they even go into effect. We can’t let hedge funds get away with dodging taxes anymore – it is time for us to speak up.

    Tell the IRS: Stop hedge funds from dodging taxes.

    Thank you for speaking out,

    1. Victor Fleischer, “Why Hedge Funds Don’t Worry About Carried Interest Tax Rules,” New York Times, May 14, 2014
    2. Ibid.
    3. Richard Rubin, Zachary Mider, and Sonali Basak, “Paulson, Highbridge Bermuda Ventures May Be at Risk From IRS,” Bloomberg, April 23, 2015
    4. David Dayen, “The IRS Will Close This Tax Loophole -- Unless Wall Street Gets Its Way,” The American Prospect, July 9, 2015.
    5. Ross Barken, “Progressive Group Takes Aim at Hedge Fund Managers,” Observer.com, March 18, 2015.
    6. Fleischer, “Why Hedge Funds Don’t Worry About Carried Interest Tax Rules.”
    7. Dayen, “The IRS Will Close This Tax Loophole -- Unless Wall Street Gets Its Way.”
    8. Ibid.