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Tax provisions in the bailout

September 29, 2008

The text of the bailout bill was released yesterday, including the details of the three tax provisions that ended up in the bill:

- Losses on Fannie Mae and Freddie Mac preferred stock held by financial institutions will be ordinary if the stock was held on September 6, 2008, or if it was sold from Janaury 1 through September 6, 2008. (Section 301 of the bill.)

- There will be a $500,000 annual compensation dedection ceiling for the top CEO and top three employees of institutions participating in the bailout. Benefitsblog has detailed coverage. (Section 302 of the bill.)

- The exclusion for forgiveness of home-mortgage debt, set to expire after 2009, was extended through 2012. (Section 303 of the bill)

Observations

The ordinary loss rule for Fannie and Freddie preferred stock is designed to help smaller banks that had overinvested in them. Because capital losses of C corporations are deductible only to the extent of capital gains, and expire if not used in five years, they often are useless tax-wise.

The compensation deduction limit is populist nonsense. If an institution is in trouble, it's likely to have trouble attracting top talent. Do you really want to rely on the guy willing to work cheap to steer a big bank clear of the rocks? It's funny that Barney Frank and Chris Dodd put this in the bailout bill now that banks are being brought down by the collapse of Fannie and Freddie, considering that they never objected to their fabulous executive compensation packages while carrying their water in Congress.

The debt forgiveness rules, which apply up to $2 million in mortgage forgiveness, give a break to the most feckless home speculators, while those who do their gambling at casinos or in the stock market get no such break.

Other views

Alex Taborrok has a wry comment on the comp limits:

If you think the situation is very dire and also that Wall Street is ruled by greed then it's a disaster as the captain may prefer to go down with his ship, rather than give up the golden parachute (life-jacket?). Thus, those who think the situation is very dire must be gambling on CEO altruism!

David Zaring at the Conglomerate has a good overview of the plan.

Kay Bell wonders if the $500,000 home sale exlusion helped get us into this mess. Perhaps, but remember that the $500,000 rule replaced an unlimited exclusion that applied as long as you spent at least as much on a replacement house as you got for the old one. Arguably a flat dollar amount distorts less, but allowing it every two years might have been too much. No doubt the Tax Foundation is right that the exclusion is bad policy, but there is no chance that it will go away when the housing market is already reeling.

Meanwhile, Greg Mankiw has a photo of a prototype of the new government vehicle to hold Mortgage-Backed Securities:

20080929-1.jpg

UPDATE: The TaxProf has more

UPDATE, 10/2: Tax provisions in the Senate-passed bill.

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