Carried-Interest Tax Loophole On Last Legs?

Apr 27 2010 | 2:35am ET

A top U.S. lawmaker is expressing confidence that Congress will close the so-called carried-interest tax loophole this year, potentially increasing taxes on hedge fund and private equity managers by billions.

Rep. Sander Levin (D-Mich.), the head of the House Ways and Means Committee, said the need to find new revenues has added impetus to the push to tax performance fees as ordinary income, rather than capital gains. The measure has been passed three times by the House of Representatives and is backed by President Barack Obama, but the Senate has yet to act on it.

But Levin said that is changing: House Democrats have been meeting with his Senate counterparty, Sen. Max Baucus (D-Mont.), and the head of the Senate Finance Committee has been more open to closing the loophole.

If it does pass, fund managers would pay the ordinary income tax rate of up to 35% on their performance fees, rather than the 15% capital gains rate.

“Why should the real estate manager of investment spay 15% or 20% and the waiter pay regular income tax?” Levin asked Reuters.

And that may only be the beginning of higher taxes on hedge fund managers and other high earners, according to Levin. The tax-writing chief predicted that the tax on dividends would rise from 15% to nearly 40%.

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