Carried Interest Among Issues Blocking Debt Deal

Jun 29 2011 | 4:12am ET

A deal on raising the U.S.'s debt ceiling may fall apart over the issue of taxes on hedge fund managers.

Vice President Joe Biden had been leading talks with Congressional Republicans for weeks before the latter quit those meetings, apparently over the White House's insistence that a deal include revenue-raising measures as well as budget cuts. Among those revenue measures could be the elimination of the carried-interest loophole, which allows alternative investment managers to pay only the 15% capital-gains tax rate on their performance fee income.

Closing that loophole could more than double the taxes paid on that income and would contribute to $400 million in new tax revenue over the next decade. Democrats are also pushing for an end to tax breaks for private jets and other specific business sectors.

White House spokesman Jay Carney said yesterday that the president believes "there is the opportunity here for a substantial compromise on a significant deficit reduction." But that optimism does not appear to extend to Capitol Hill, where Democrats and Republicans spent the day sniping at each other. Senate Minority Leader Mitch McConnell (R-Ky.) said a deal "seems to be blocked by the insistence on raising taxes in the middle of an economic slowdown." Senate Majority Leader Harry Reid (D-Nev.) shot back, "Republicans walked away from the negotiating table to save tax breaks for corporate jets."

Obama and Biden are to meet with Senate Democrats today. But no further meetings are scheduled between the president and Congressional Republicans.

The Biden talks reached agreement on between $1.5 trillion and $2 trillion in spending cuts over the next decade. But over the weekend, the vice president took aim at his interlocutors, and at hedge funds, in a speech in Ohio.

"We're not going to let the middle class carry the whole burden," Biden said of the cuts.

The vice president singled out hedge fund managers, who he told the state Democratic Party's annual dinner, "play with other people's money."

"And they get taxed. I'm not saying they don't do good things; they do some good things," Biden said. "But they get taxed at 15% because they call it capital gains. Because they're investing not their money, [but] other people's money."

"We're never going to get this done, we're never going to solve our debt problem, if we ask only those who are struggling in this economy to bear the burden and let the most fortunate among us off the hook."

The Treasury Dept. says that U.S. will hit its $14.3 trillion debt limit on Aug. 2, an event that could lead to the country's first-ever debt default.

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