Carried-Interest Tax, Volcker Rule Still Kicking

May 20 2010 | 2:12pm ET

A pair of proposals that could have a big impact on the hedge fund and private equity industries have reappeared on the floor of the U.S. Congress.

A bill that would increase taxes on performance fee income was introduced in both houses on Capitol Hill today. The proposal would close the so-called “carried-interest” loophole, which taxes a manager’s share of a fund’s profit as capital gains, rather than ordinary income.

Capital gains are taxed at 15%, while ordinary income is taxed at a top rate of 35%.

The bill would allow some carried interest to continue to be taxed as capital gains. But at least 75% of the rest would have be treated as ordinary income.

Meanwhile, Sens. Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.) have amended their amendment that would tighten up the proposed Volcker rule, which would bar banks from the hedge fund and private equity industries. Republicans earlier this week blocked a vote on the rule.

The change would allow the amendment to be added to the overall financial overhaul bill even after the Senate votes to limit debate on and changes to the matter.

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