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White House's Orszag Says Higher Tax in Fund Managers to Pass Within Weeks

Date: Thursday, May 13, 2010
Author: Bloomberg

White House budget director Peter Orszag predicted Congress would approve higher taxes on managers of private equity firms, real estate funds and other investment partnerships in the coming weeks.

Orszag, speaking yesterday at a conference in New York sponsored by the Reuters news agency, said, “I believe that there will be some legislative changes in carried interest, although the exact parameters are still being negotiated.” He said he expected the Senate to pass the levy “within the next few weeks.”

Carried interest is the profit share paid to general partners of the firms, typically 20 percent of a fund’s gains above a set amount. That share is taxed at the 15 percent capital gains rate; lawmakers including House Ways and Means Committee Chairman Sander Levin want to more than double the rate by taxing it as ordinary income.

Levin, a Michigan Democrat, previously proposed legislation to classify carried interest as ordinary income, subject to a top rate of 35 percent. That idea has been approved by the House three times in recent years and died each time in the Senate.

Levin’s efforts are gaining momentum in Congress this month as a way to pay for a jobs bill. A lobbying blitz by the Real Estate Roundtable, Venture Capital Association and private equity firms such as Blackstone Group LP and KKR & Co. helped kill the idea in the Senate in 2007.

Pressed by Obama

Senate Democratic leaders are being pressed to approve a carried-interest tax increase by President Barack Obama’s administration, which has twice sought the higher taxes in budget requests.

Senator Charles Schumer, a New York Democrat, said last month the chamber was considering adopting the House plan. Any jobs measure containing the provision would likely require 60 votes to pass the Senate. An earlier version of the jobs bill that didn’t contain the tax increase on fund managers passed the Senate 62-36 in March, with four Republicans joining the entire Democratic caucus in favor.

The jobs bill would extend the Build America Bonds program, provide benefits for unemployed workers and renew dozens of tax cuts that benefit businesses, including a research tax credit worth billions of dollars to manufacturers.

Orszag said the carried interest proposal is being driven by a need for revenue and by a negative “perception of Wall Street and the financial markets.” He said he sees no “credible evidence” the tax would have a “significant adverse effect” on executives’ work efforts, choice of work location or risk-taking.

Softening the Blow

He also said the tax would have less of an impact on hedge funds, which engage in high-frequency trading that doesn’t qualify for long-term capital gains rates, than it would on buyout firms and real estate partnerships.

The industries, meanwhile, are maneuvering to fight the legislation or at least soften the blow.

The Real Estate Roundtable last week said it is trying to persuade Congress to either adopt a blended tax rate that combines the capital gains and ordinary income tax rates, or keep the capital gains rate for profits from longer-term investments of between two and five years.

The National Venture Capital Association sent a letter to senators containing 1,700 signatures seeking a carve-out for the industry.

“By maintaining capital gains tax status for venture capital carried interest you will be taking ‘less’ out of ‘jobless recovery’ -- by supporting company formation, innovation and economic growth in the U.S.,” wrote Kate Mitchell, managing director of Scale Venture Partners and chairwoman of the association.