Renaissance Technologies, a hedge fund management company with more than $24 billion in assets, has avoided more than $6 billion in U.S. income tax over the past 14 years, according to a Senate committee.
According to the Senate Permanent Subcommittee on Investigations, Renaissance used structured financial products, known as “basket options” from Barclays (BCS) and Deutsche Bank (DB) in order to reclassify rapid trading gains as long-term capital gains, which are taxed at a lower rate.
These basket options also allowed Renaissance to evade federal leverage limits, according to the report. Where average investors using a brokerage account are generally allowed to borrow $1 for every $2 in their account, Renaissance Technologies used the financial structures to borrow as much as $17 for $1 in the account, according to the New York Times.
“These banks and hedge funds used dubious structured financial products in a giant game of ‘let’s pretend,’ costing the Treasury billions and bypassing safeguards that protect the economy from excessive bank lending for stock speculation,” Senator Carl Levin writes in the 93-page report.
Renaissance released a statement last week stating that they believe the “tax treatment for the options transactions being reviewed are appropriate under current law.”
Executives from Renaissance, Barclays and Deutsche Bank are scheduled to testify Tuesday about these transactions.
“[Renaissance was] able to make huge bets at the banks' risk, on the banks balance sheets and pay lower taxes as though they were long-term gains,” says Yahoo Finance’s Jeff Macke.
Senator Levin told reporters in Washington on Monday that this, “meant enormous profits for both the banks and hedge funds… Ordinary Americans had to shoulder a tax burden of billions of dollars, a burden that was shrugged off by those hedge funds.”
According to Macke, however, “really you should care about all the people who are trying to get you outraged because the very people that are complaining about these funds exploiting, about the banks taking advantage of these tax loopholes, they’re the guys that created the loophole!”
As for the results of this investigation, “We’ll just close these particular loopholes and create different ones,” says Macke. “It’s part of a theme in D.C. right now… where the U.S. has created this perverse incentive system where you can save billions and billions simply by working within the tax code legally but in a way that feels a little squishy.”
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