An eye-popping $7 billion tax settlement disclosed this month between Renaissance Technologies LLC and the Internal Revenue Service is only as staggering as the investor returns the hedge fund generates from its East Setauket base of operations.
Consider one icon of RenTec’s massive profitability since its founding in the 1980s by famed math genius and mega-philanthropist James Simons: its flagship Medallion Fund. Restricted to RenTec employees, select friends and family members, it reportedly generated more than 35% annualized in recent decades, according to Bloomberg Business.
Renaissance's epic dispute with the IRS dragged on behind the scenes for many years. The standoff involved a financial contrivance called basket options. Bottom line: This practice allowed short-term trading gains from certain stocks to be seen as long-term profits — which are taxed at a significantly lower rate.
Public officials, concerned about the perennial problem of tax avoidance, objected. A 2014 investigative report from a Senate subcommittee said Renaissance executives misused the complicated options to lay claim to unjustified tax savings. The final outcome of the IRS-Renaissance fight vindicates this 7-year-old finding.
Timing is key in government. This tax dispute ends just as the White House and Congress are trying to finance a multi-trillion-dollar infrastructure program.
The narrowest take-away is that a big planned increase in IRS enforcement will benefit taxpayers as long as the efforts are focused on the big players, not pizza places and auto-repair shops. The nonpartisan Congressional Budget Office says President Joe Biden's proposed increase in funding for the IRS by $80 billion over the 2022–2031 period would boost federal revenue by some $200 billion over those 10 years.
More broadly, the supersized deal dramatically bolsters the argument for sensibly taxing the superrich for a fair shouldering of the burden of the nation's needs. Just the $7 billion from a single settlement would make, say, a fitting if token down payment on expanding Medicare to cover dental and vision costs for enrolled seniors.
This Renaissance settlement transcends the clashing political profiles of Simons, a supporter of Democratic candidates and liberal causes, and former Renaissance CEO Robert Mercer, whose right-wing leanings and wealth once helped empower the Ted Cruz and Donald Trump campaign operations.
The Biden administration is pushing sweeping tax-policy changes, including a tax-avoidance crackdown regardless of whom the mega-rich support politically.
"We lose more than $100 billion a year in tax revenue owed from the top 1% of taxpayers alone," President Joe Biden said this month, "not because of low tax rates, but because wealthy people aren’t paying the taxes they owe." Big corporations, as he noted, are on a lobbying offensive against such changes.
The Renaissance IRS settlement should encourage Congress to take proportional, realistic steps to ease income inequality.
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