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Shutdown Of Deferred Offshore Compensation Sought By Kerry

by Leroy Baker,, New York

19 October 2007

US Senator John Kerry (D-Mass.) and US Representative Rahm Emanuel (D-Ill.) have introduced legislation that aims to curb the ability of high-income taxpayers to defer unlimited amounts of offshore compensation.

The legislation, known as the Offshore Deferred Compensation Reform Act, would create a new section in the Internal Revenue Code that eliminates the ability of US taxpayers to defer nonqualified compensation in offshore jurisdictions. Offshore nonqualified deferred compensation paid by a foreign corporation will be taxable income when there is no substantial risk of forfeiture to the compensation.

According to the lawmakers, such legislation would restore "fairness" to the US tax code, while levelling the playing field for US taxpayers.

"I've been focused for a long time on the 'separate and unequal' system in America, where those at the very top get all the benefits and loopholes to avoid paying their fair share of taxes, and working families get stuck with the bill,” announced Kerry. “I fought to make tax fairness an issue in 2004 as a presidential candidate, and now as a Senator I'm fighting to make reform a reality. I'm working with Rahm Emanuel to fix the tax code to help more families save for college and retirement, not help millionaires hide their money offshore."

“Middle-class taxpayers that are saving for college or their retirement can’t avoid paying taxes by deferring millions offshore,” added Emanuel. “Congress needs to reform the tax code to assure all Americans that they are on a level playing field regardless of their income level. This legislation takes an important step toward achieving that goal.”

Most Americans can defer income through a qualified retirement plan (e.g. 401k) and an Individual Retirement Account (IRA). In 2007, an individual can defer up to $15,500 in income into a 401(k), or similar account, and an additional $4,000 in an IRA. But, citing press reports, Emmanuel and Kerry said that by contrast, US-based hedge fund managers who operate offshore investment funds can defer unlimited amounts of their compensation. While the deferrals technically comply with current law, they argued that there is a clear inequity between the amounts that middle-class Americans can defer through mainstream tax incentives for retirement, and what high-income taxpayers can defer through offshore corporations.

According to an annual ranking of the top 25 hedge fund earners by Institutional Investor’s Alpha magazine in 2006, the average amount earned was $570 million. In total the top 25 earned a combined $14 billion, equivalent to the GDP of Jordan or Uruguay.

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