Bailout Negotiations Include Proposals for Tax on Wall Street, Permit Higher Losses on Stock Sales

September 27, 2008

The fluid negotiations over the proposed bailout package include two tax-related components. One would affect preferred stockholders in Fannie Mae and Freddie Mac who sold between January 1 and September 7 (the day both were seized by the federal government), by treating their capital loss as ordinary income and not at the lower long term capital gain rate. Financial institutions were often pressured by the government to purchase "safe" stock in Fannie and Freddie, and this rule change is essentially restitution for that pressure.

Meanwhile, House Speaker Nancy Pelosi has proposed that if the bailout does not recoup its costs within 5 years, that "Wall Street" financial institutions pay a "fee" to make up the difference (another example of disingenuously using the word "fee" to avoid being labeled a tax-hiker). The proposal is sufficiently vague that it defies commentary, other than to say that simultaneously subsidizing a company with a bailout, while taxing them to cover the cost of the subsidy, seems kind of strange.

(Note: Updated Sept. 29 with new info.)

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