When your money manager sends you a statement at the end of the year saying you’ve just racked up 10% in short-term gains (the kind Bernie Madoff said he racked up for you), you do what all good citizens do: Pay your capital gains taxes. Anywhere between 15% and 50% of gains, depending on where you live, how much you make, etc.
And that means that over the years, Uncle Sam has funded some nice, fat government programs with Bernie Madoff profit-driven fantasy tax dollars. And now the folks who gave Uncle Sam those fantasy tax dollars are going to want them back. So add another $17 billion or so to next year’s deficit.
AP: By some estimates, the Internal Revenue Service could be out as much as $17 billion in lost tax revenue.
“This is one more thing federal, state and local officials will have to deal with,” said John Berrie, a tax partner at the law firm Bryan Cave in New York City. “It’s another heavy box on their back.”
In addition, investors may be counting on a federally mandated insurance fund to bail them out, but that program lacks the money to pay for all the claims that are likely to come.
The timing couldn’t be worse. Unemployment has surged, meaning fewer workers are paying payroll taxes. And housing prices have dropped, reducing property taxes.
The recession so far has cost the federal government $200 billion in tax revenues for the 12 months that ended in November, according to estimates by Moody’s Economy.com.
The Madoff case, which reportedly involves $50 billion, adds another layer to the fiscal crisis gripping the nation.