Emanuel, Kerry plan legislation targeting hedge-fund managers’ deferred comp

Rep. Rahm Emanuel (D-Ill.) will introduce a bill as soon as Thursday to stem the billions in tax-deferred compensation that hedge-fund managers and other wealthy taxpayers stash away each year in offshore tax havens, and Sen. John Kerry (D-Mass.) said he would follow suit with similar legislation in the Senate.

{mosads}Emanuel’s bill would bar all U.S. taxpayers from using offshore jurisdictions to defer paying taxes on their compensation, stamping out a widespread practice among hedge-fund managers that gives them a huge advantage in building their retirement nest eggs.

“It’s totally legal today, but the question is: Is it appropriate and is it right?” Emanuel said. “The bill deals with all corporate executives who are deferring income, not just those in the hedge-fund industry.”

Kerry, who repeatedly called attention to the discrepancy between the deferral amounts available to average Americans versus wealthy executives during his 2004 presidential bid, said he was pursuing legislation similar to Emanuel’s: “We’ve been looking at it for some time.”

Said a Kerry spokesman: “He’s working with his colleagues to fix the tax code to help more families save for college and retirement, not help millionaires hide their money offshore.”

 Most Americans are allowed to defer taxes on up to only $19,500 in pay each year through 401(k) plans or individual retirement accounts. By contrast, senior executives and other wealthy taxpayers are better able to make use of so-called “non-qualified” deferrals that allow them to put off paying taxes on unlimited amounts of pay.

Earlier this year, the Senate approved an annual cap of $1 million on all taxpayer deferrals, but it was dropped in negotiations with the House.

Though Emanuel’s legislation could hit other sectors, hedge-fund managers likely will be affected the most because they are unusually positioned to use offshore tax havens to defer hefty portions of their pay.

In contrast to most U.S. corporations, which are not able to deduct the total deferrals taken by their employees until after the compensation is paid, corporations located in offshore no-tax jurisdictions don’t suffer any economic loss when they allow their employees to defer compensation, since they don’t have a tax liability.

Hedge funds must set up corporations offshore so that their tax-exempt investors, such as pension funds and endowments, don’t get hit with the income tax on their earnings. The prevalence of hedge funds located in offshore tax havens has led fund managers to defer large amounts of pay.

Last month, Emanuel said he would propose legislation to cap the compensation hedge-fund managers could defer to $19,500, but he then decided to take a broader approach that does not target any one industry. The Managed Funds Association had criticized the original Emanuel proposal for singling out the hedge-fund industry.

However, the broader approach could attract more opposition to the bill. “We are concerned about provisions that limit or reduce incentives to save and invest for retirement,” Scott Talbott, senior vice president for government relations at the Financial Services Roundtable, said.