Paulson’s Taxes

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The New York Sun

What happens to a tax deferred? President Bush’s new nominee to be treasury secretary, Henry Paulson, is about to find out. To comply with government ethics rules, Mr. Paulson will likely have to sell off a significant chunk of his stock holdings in Goldman Sachs, valued at $484 million. Ordinarily that would incur a hefty capital gains tax, even under the reduced rates pushed by Mr. Paulson’s new boss. Under a provision in the 1989 law governing the ethics of presidential appointees, however, Mr. Paulson can put in for a certificate of divestiture stating that he is selling the stocks to comply with the rules. As long as he uses the proceeds of the sale to re-invest in ethics-approved assets like mutual funds, he defers capital gains taxes until he sells the mutual fund, at which point the basis for capital gains calculation becomes the original purchase price of his stocks. The certificate effectively allows him to defer payment of capital gains taxes.

The value of deferred taxes has been estimated at $48 million, according to a recent dispatch in the New York Times. Although the specifics are unclear, Mr. Paulson holds 3.23 million shares in Goldman, a stock that closed north of $150 last week after hitting the market at a third that in 1999. Most of the rest of his $700 million portfolio is said to be tied to Goldman-related assets.

So, as Jessica Holzer of Forbes has observed, Mr. Paulson will be diversifying his portfolio as any rational investor would but, unlike almost any other rational investor, he gets to do it tax free. Mr. Paulson has a solid track record supporting Mr. Bush’s tax cuts and understands that if federal deficits are a problem, reducing spending, not increasing taxation, is the solution. He will now experience firsthand how useful tax relief can be. Here’s to a day when all investors will be free to make sane decisions without the intrusion of the tax man.

The New York Sun

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