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US bill would boost hedge fund, private equity tax

Date: Monday, April 6, 2009
Author: Reuters.com

Legislation that would boost the tax rate paid by many hedge fund and private equity fund managers was introduced in the U.S. House of Representatives by Democratic Rep. Sander Levin, an aide to Levin said on Friday.

President Barack Obama's budget proposal included a similar proposal to close the so-called "carried interest" tax loophole for managers of the funds in fiscal 2011 as a way to generate more federal revenues.

Carried interest is the cut of profits that private equity and hedge fund partners typically keep as their compensation. Currently, the compensation is taxed at the 15 percent long-term capital gains rate instead of the ordinary tax rate of up to 35 percent.

"This is a basic issue of fairness," Levin, a member of the tax-writing House Ways and Means Committee, said in a statement. "This proposal is not about taxing investment, it's about ensuring that all compensation is treated equally for tax purposes."

Critics say profits generated by increasing the value of capital assets should continue to be treated as capital gains, and that closing the loophole would hurt many other kinds of partnership businesses such as real estate and venture capital firms.

Under Levin's bill, any income received from a partnership in compensation for services provided would be subject to ordinary tax rates. Fund managers could apply the capital gains rate of 15 percent only on capital they actually invested themselves in the partnership.

The hedge fund industry lobbied to kill similar legislation in late 2007.