Hedge Fund, Private Equity Tax Hike On Hold

Oct 9 2007 | 11:18am ET

Hedge and private equity fund managers will not face a huge tax hike on their earnings this year, after the U.S. Senate passed on considering a bill that could have more than doubled their contribution to Uncle Sam’s coffers.

Sen. Harry Reid (D-N.M.), the Senate majority leader, has told p.e. firms—which lobbied heavily against the measure—that the Senate will not consider a pair of bills designed to change the way managers’ earning are taxed, according to the Washington Post. Reid reportedly said that the measure, which has high-profile support among Democratic lawmakers, and has even become a cause for Democratic presidential candidates, won’t make the cut due to a busy legislative calendar.

Under a proposal sponsored by Reps. Sander Levin (D-Mich.) and Charles Rangel (D-N.Y.)—which may still see action in House of Represenatives—performance fee income, which is generally treated as capital gains by the Internal Revenue Service and consequently taxed at a 15% rate, would be taxed as ordinary income, which would take a 35% bite out of the “carried interest,” as the profit share is known. A separate proposal, sponsored by Sens. Max Baucus (D-Mont.) and Charles Grassley (R-Iowa) would have slapped a 35% corporate tax rate only on alternative investment firms that go public.

Private equity firms have reportedly spent four times as much on lobbying this year than they did all last year, with The Blackstone Group accounting for more than half of the total.

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