Carried-Interest Tax Hike Talk Returns

Apr 14 2010 | 11:08am ET

It seems necessity can be the mother of legislation. A proposal to more than double taxes paid by hedge and private equity fund managers on some of their income is gaining momentum.

The U.S. Senate is considering the so-called “carried interest” loophole, which taxes performance fees earned by alternative investment managers as capital gains rather than ordinary interest. Capital gains are currently taxed at 15%—rising to 20% next year—while income is taxed at a top rate of 35%, rising to 39.6% in 2011.

Sen. Charles Schumer (D-N.Y.) acknowledged yesterday that closing the carried-interest loophole is “one of the things being considered.” Despite the fact that the House of Representatives has passed the bill three times, it has yet to come to a vote in the Senate, where some Democrats are known to oppose the measure.

But the White House is pushing for the tax hike, and Sen. Max Baucus (D-Mont.), who heads the Senate Finance Committee, admits that a growing need for revenue—the proposal would raise $24.6 billion over 10 years—may have changed some minds.

Baucus has previously said he would tackle the carried-interest loophole only as part of a broad tax overhaul.

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