The leading tax writer in the U.S. House of Representatives said on Monday his effort to tax hedge f

Date: Tuesday, April 27, 2010
Author: Reuters

The leading tax writer in the U.S. House of Representatives said on Monday his effort to tax hedge fund and private equity managers at ordinary income rates has the best chance in years to become law.

Talks between Democratic leaders and the U.S. Senate's chief taxwriter signal the tax has gained new political momentum as lawmakers hunt for new revenue sources, Sander Levin, chairman of the House Ways and Means Committee, said at the Reuters Global Financial Regulation Summit in Washington.

"We have to find the resources" to fund "must pass" items like an extension of a series of tax breaks, including a popular research and development tax credit for business.

Much income earned by hedge fund and private equity managers is now taxed at the capital gains rate of 15 percent. Levin and other backers want to treat that income as ordinary income, to be taxed at 35 percent.

"Why should the real estate manager of investments pay 15 or 20 percent and the waiter pay regular income tax?" Levin said.

The measure to boost the tax has passed the House three times, but has always hit resistance in the Senate. Levin has been involved in recent talks on the issue and Democratic leadership has held meetings with Senator Max Baucus, his counterpart in the Senate who has been reluctant to back the tax.

DIVIDEND, ESTATE TAX

Levin also predicted that the tax rate on dividends will rise to about 40 percent next year for individuals making $200,000 and couples making more than $250,000.

President Barack Obama has called for raising the tax rate on capital gains and dividends to 20 percent from 15 percent for that income group.

But under current law, the rate on dividends jumps to 39.6 percent next year if Congress doesn't act. That was the rate it was before a series of tax cuts enacted in 2001 and beyond. So lawmakers need to find a way to pay for the $200 billion price tag over the decade needed to keep the dividend rate lower.

"My guess is the tax on dividends will go back to where it was, (39.6 percent)" prior to the tax changes earlier in the decade, he said.

"It has to be paid for and that's expensive," he said.

Another hot tax issue is the estate tax, which expired last year after lawmakers were unable to reach a deal to extend it. Levin said he expects to re-enact the tax retroactively at 2009 levels this year.

That would tax estates at a rate of 45 percent, after a $3.5 million exemption for individuals and $7 million for couples. Congress is compelled to act because if no action is taken, the rate jumps to 55 percent next year with a $1 million exemption amount.