Higher Hedge Fund, P.E. Taxes No Slam Dunk

Feb 26 2009 | 11:15am ET

When Democrats in the House of Representatives sought over the last two years to close a pair of tax loopholes that currently save alternative investments professionals hundreds of millions of dollars, they ran into the intractable opposition of Republicans in the Senate and of former President George W. Bush.

Now, President Barack Obama is seeking to raise taxes on hedge fund and private equity managers once again, but he’s finding resistance in a more unexpected place: among his former colleagues in the Senate Democratic caucus.

Some of the top Democrats on the Senate Finance Committee, including a pair of its most liberal members, are hesistant to back Obama’s plan to treat carried interest as ordinary income, potentially more than doubling the rate at which it is taxed, according to The Hill newspaper. Sens. Charles Schumer (D-N.Y.) and John Kerry (D-Mass.), along with Sen. Max Baucus (D-Mont.), the committee’s chairman, have not yet backed the move. Schumer resisted it in the last Congress, where Democrats enjoyed a perilously slim 51-49 majority. Thanks in no small part to Schumer’s efforts as the Democrats’ campaign chief, and some $25 million in donations from alternative investments employees, Democrats currently enjoy a 58-41 edge in the Senate chamber, but that apparently doesn’t guarantee passage of Obama’s plan to cut the budget deficit in half.

Kerry says he is concerned about its impact the tax hikes will have. “I am concerned we were trying to draw distinctions among the different entities it might or might not be applied,” he told the Hill. Baucus, commenting on Obama’s deficit reduction plan, said, “There’s lots of ways to do lots of things.”

Schumer now says he would support higher taxes on hedge fund managers and private equity executives, and Kerry acknowledges that the world has changed since the last time the measure was proposed.

“I think the argument is much different now in the context of what has since happened.”

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