Obama Budget Would Boost Hedge Fund, P.E. Taxes

Feb 1 2010 | 2:15pm ET

President Barack Obama is asking hedge fund and private equity managers to foot a big chunk of the bill for his proposed $3.76 trillion budget.

The president’s plan would eliminate the so-called carried-interest loophole, which taxes fee income earned by alternative investments professionals as capital gains, rather than ordinary income. The Obama plan would tax performance fee income as ordinary income, nearly tripling the amount some managers will pay. The provision would add $24 billion to the government’s coffers over the next 10 years.

The fiscal year 2011 budget also includes several other tax provisions likely to hit the alternative investments industry hard. Obama has proposed allowing the tax cuts on wealthy Americans pushed through by President George W. Bush to expire, increasing the top income-tax bracket to 39.6%. That would net nearly $1 trillion in new revenues for the government as it struggles to both prop up the U.S.’s ailing economy and cut its ballooning deficit.

Obama is also seeking an additional $122 billion from banks and multinational corporations, and $37 billion more from oil and gas companies.

The president has proposed cutting the budgets of five cabinet departments, while pouring $76 billion into a new jobs-creation program and $25.5 billion into state government coffers.

A further bitter pill for the alternative investments business is that their higher tax burden will help boost funding for the Securities and Exchange Commission by 11%. Obama wants to boost the agency’s budget from $1.11 billion to $1.23 billion to allow it to “address increasingly complex financial products and transactions.” The president’s budget would also boost the Commodity Futures Trading Commission’s budget by 55% to $261 million.

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