Paul L. Caron

Thursday, January 7, 2010

WSJ: Carried Interest Tax Gains Traction in Congress

Wall Street Journal, Congress Has Hedge Funds, Buyout Firms in Tax Sights, by Peter Lattman, Jenny Strasberg & Naftali Bendavid:

The "carried-interest" tax debate has re-emerged in Congress, threatening to more than double taxes on some of the country's wealthiest individuals—private-equity and hedge-fund managers.

The issue flared in 2007, only to die when the financial crisis struck. This time around, amid soaring deficits and hostility over Wall Street pay, most fund managers have resigned themselves to higher tax bills. Still, they hope to delay or lessen the effect of proposed changes.

The House of Representatives voted last month to treat a large chunk of private-equity and hedge-fund managers' income as regular salary rather than more lightly taxed capital gains. The measure would increase taxes on carried interest—the 20% cut of a fund's profits to which these managers are often entitled. Currently, that income is taxed at a capital-gains rate of 15%, a figure well below the 35% tax on ordinary income. ...

University of Colorado tax law professor Victor Fleischer, whose views caught the attention of Congress two years ago, agrees with this approach. He notes that profits earned by managers from their own money invested in their funds—typically a small percentage of the total fund size—are appropriately taxed at capital-gains rates. But he said the portion of pay managers get for investing other people's money should be taxed at ordinary income rates, just like other forms of salary.

"It's amazing to me that at the same time the U.K. is imposing a 50% excise tax on bankers' bonuses, the private-equity guys aren't even willing to pay the usual ordinary income rate," Mr. Fleischer said. "You would think they would recognize a fair deal when it's offered."

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