NCPA - National Center for Policy Analysis


July 12, 2006

As the new treasury secretary, Wall Street financier Henry Paulson will enjoy a one-time, tax-free capital gains exemption.  Given Paulson's reported wealth, this tax deal could save him $100 million in taxes, says columnist Bruce Bartlett.

This tax provision was enacted so wealthy people would not turn down high-level appointments because they didn't want to pay the steep capital gains taxes when they sold their assets to comply with government ethics rules.

  • Assuming that most of Paulson's estimated $700 million wealth consists of unrealized capital gains, he would pay 15 percent in federal taxes, plus state and local taxes, or about $100 million total, without the exemption.
  • To prevent someone like Paulson from having to pay a $100 million tax just to become treasury secretary, the law allows him to roll these assets over into a blind trust or a broad-based mutual fund without paying tax at this time.
  • After he leaves government service and sells these assets, the original tax basis would be retained, so in effect he would pay the tax then. But in the meantime, he has $100 million more working for him, earning a return, which would otherwise have gone into the Treasury's general fund.

As long as the money is not being taken out for the purpose of consumption, says Bartlett, then why shouldn't all investments be treated the way Paulson is allowed to treat his divestment?

It would be a simple matter to establish rollover accounts in which all gains within the account are tax-free and only withdrawals are taxed.  It would be like a Roth IRA, except with no age or income restriction.  Then everyone would have the same tax benefit Paulson and other government executives have, says Bartlett.


Source: Bruce Bartlett, "Paulson's special tax deal,", July 11, 2006.

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