Bush May Oppose Tax Hike on Fund Managers, Aide Says (Update1)

Date: Wednesday, June 27, 2007
Author: Ryan J. Donmoyer and Roger Runningen

June 27 (Bloomberg) -- White House spokesman Tony Snow suggested that the Bush administration will oppose legislation that would more than double taxes paid by many managers of hedge funds and buyout firms.

``This is not an administration that's predisposed toward tax increases,'' Snow told reporters in response to a question about legislation introduced on June 22 by top House Democrats.

The legislation would tax the share of profits that managers receive for investment services at ordinary income-tax rates as high as 35 percent. Currently, that income, known as ``carried interest,'' is taxed at capital gains rates as low as 15 percent.

Snow's comments were the first from the Bush administration on the question of whether hedge funds and buyout firms are too lightly taxed, as some lawmakers charge.

The House legislation, initiated by Representative Sander Levin, a Michigan Democrat, is the first comprehensive measure to raise rates on the tax treatment for all hedge funds and buyout firms. It would also affect other partnerships, including those that invest in commercial real estate and oil and gas pipelines as well as venture capital firms.

The tax structure of hedge funds and buyout firms has drawn congressional attention in the wake of billion-dollar paydays for fund managers. The Senate Finance Committee also is studying the issue, according to Chairman Max Baucus, a Montana Democrat.

Senate Legislation

The House measure is separate from a narrower bill in the Senate that would force hedge-fund and buyout firms such as New York-based Blackstone Group LP that go public to pay taxes at corporate rates as high as 35 percent instead of as partnerships, where individual partners pay taxes as low as 15 percent on their share of income.

The Levin proposal is backed by Ways and Means Committee Chairman Charles Rangel of New York and House Financial Services Committee Chairman Barney Frank of Massachusetts.

Frank said fund managers are getting undue benefits from the tax code.

``I think they are getting a tax reduction they don't deserve,'' he said in an interview yesterday. ``I don't think you should be getting a capital gains tax for managing other people's money.''

Levin's proposal has drawn sharp criticism from trade groups representing partnerships.

``It is a blow to capital formation,'' Jeffrey DeBoer, president and chief executive officer of the Real Estate Roundtable, wrote in a letter yesterday to Levin.

Lisa McGreevy, executive vice president of the Washington- based Managed Funds Association, the primary lobbying group representing hedge funds, said last week ``this is not about compensation for services. This is about the nature of long-term investment and capital formation.''

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net