Raskolnikov Testifies on Tax Treatment of Derivatives

Press contact:
James O’Neill 212-854-1584 Cell: 646-596-2935
March 6, 2008 (NEW YORK) – Alex Raskolnikov, a Columbia Law School expert on federal income taxation and tax policy, gave testimony yesterday on the tax treatment of derivatives before a U.S. House subcommittee.
Raskolnikov (at left) told members of the House Ways and Means Committee’s Subcommittee on Select Revenue Measures that “financial derivatives offer unprecedented opportunities to reduce or eliminate capital income taxation.” The hearing was related to the introduction of a bill by Rep. Richard E. Neal of Massachusetts, chairman of the subcommittee, to revoke the tax benefits of exchange-traded notes, a form of retail derivative.
Controversy reigns over whether derivatives should qualify for the tax benefits they currently enjoy. Investment firms have marketed derivates to small investors as a tax-efficient way to gain access to a variety of commodities and assets, from oil to foreign stock indexes, at a fraction of the cost of making direct investments.
The Treasury Department announced in December that it would begin to evaluate whether derivatives should qualify for these tax benefits.
Raskolnikov said during his testimony yesterday that in the absence of a comprehensive income tax reform, “it is impossible to tax financial derivatives in a manner that meets any acceptable benchmark of an effective and efficient capital income tax. As long as the current rules are in place, symmetry, consistency and balance will all remain unattainable.”
He told the subcommittee that Congress “should continue to intervene when financial innovation threatens to eliminate substantial amounts of capital income from the tax base even though these interventions will produce imperfect results.
“All derivatives,” he said, “should be subject to a mark-to-market regime, and gains and losses from derivatives should be taxed at the top individual or corporate ordinary income rate.”
To read Raskolnikov’s full testimony, click here.
Columbia Law School, founded in 1858, stands at the forefront of legal education and of the law in a global society. Columbia Law School joins traditional strengths in international and comparative law, constitutional law, administrative law, business law and human rights law with pioneering work in the areas of intellectual property, digital technology, sexuality and gender, and criminal law.