Tax man eyeing those PE profits
Rangel wants firms, hedge funds to pay individual ratesThe private equity firms that have pumped billions into Hollywood may have dodged a U.S. legislative bullet this year, as attempts to raise taxes on the funds by treating their profits as regular income have faltered.
While Senate aides said majority leader Sen. Harry Reid, D-Nev., has told funds representatives and lawmakers that changes will not happen this year, his colleagues on the other side of the Capitol are signaling that they aren't willing to go along with his desires.
Rep. Charlie Rangel, D-N.Y., introduced legislation Oct. 25 that would require PE firms to pay the same rate as individuals, although he wants to lower the top corporate marginal tax rate from 35% to 30.5%. As chairman of the House Committee on Ways and Means, Rangel has considerable influence on tax law.
The funds have become targets for Democratic lawmakers and some presidential candidates who contend that they have been chronically undertaxed.
In response, PE firms hired dozens of lobbyists, increased campaign contributions and lined up other businesses to help wage a lobbying blitz. They argue that higher taxes would run counter to accepted tax policy and slow economic growth.
Rangel's proposed legislation would raise taxes from 15% to as much as 35% for profits earned by private equity and hedge funds, and fees paid to their managers.
It is still unclear if Rangel's plan would survive, because the driving force behind tax legislation is a desire by both Republicans and Democrats to repeal the alternative minimum tax.
The Rangel proposal would extend the current AMT relief for one year, at an estimated cost of $47 billion over 10 years.
He has suggested that he will break the AMT provisions out into a separate bill, which could make it easier for the private equity firms and their allies in Congress to defeat any tax increase aimed at the funds.
Currently these fees, known as "carried interest," are taxed as capital gains, not income. A wide swath of industries, including hedge funds, venture capitalists and real estate partnerships, are concerned that the tax-raising effort could affect all companies set up as limited partnerships.
Killing any tax increase in 2007 probably would render it dead until after 2008, as Congress tends to be leery of raising taxes in election years.
During a Finance Committee hearing, Bruce Rosenblum, managing director of the Carlyle Group, argued that changing the tax treatment for private equity managers would have adverse consequences.
"There will be deals that don't get done. There will be entrepreneurs that won't get funded and turnarounds that won't get undertaken," said Rosenblum, who also is chairman of the Private Equity Council, an industry group.
The hearing was the panel's second look at the issue. Last month, key Democrats on the panel -- including Sen. Charles Schumer, D-N.Y., and Sen. John Kerry, D-Mass. -- expressed reservations about the effort.
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