Carried Interest Tax Hike Dropped From Tax Bill

Dec 6 2010 | 1:00pm ET

The phoenix that is a tax hike on performance fees has risen, only to fall, almost countless times over the past four years. But for this year—and, in all likelihood, the next two years—it is back to the ashes.

Sen. Max Baucus (D-Mont.) has dropped a provision in the contentious tax cut bill that would have more than doubled taxes on carried interest. Under a loophole in the tax laws, hedge and private equity fund managers pay only the capital gains rate on their share of a fund's profit, rather than the ordinary income rate. The former is currently just 15%, the latter can be as high as 35%.

Instead, the bill will simply include an extension on middle-class tax cuts and the renewal of dozens of business tax breaks without the new taxes on alternative investment fund managers to help offset them.

The House of Representatives, since Democrats took control in 2006, has consistently passed bills closing the carried interest loophole, and the increased taxes have been pushed for by President Barack Obama and Treasury Secretary Timothy Geithner. But the measures have always fallen short in the Senate.

And with Republicans set to take control of the House next month, it's likely that that body won't continue its annual tradition of passing the tax hike. Republicans have consistently opposed raising taxes on carried interest.

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