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WASHINGTON - July 11: Eric Solomon, assistant secretary of the Treasury for tax policy, Peter R. Orszag, director Congressional Budget Office, Andrew Donohue, director of the Division of Investment Management at the Securities and Exchange Commission, and Kate D. Mitchell, managing director of Scale Venture Partners in Foster City, Calif., during the Senate Finance hearing on whether to raise taxes on the managers of private equity firms. Lawmakers are taking an intense look at the buyout firms because of their growing prominence and because most of their booming profits are taxed as capital gains with a top rate of 15 percent, as opposed to ordinary income with a top rate of 35 percent. That's because firm managers are compensated with a relatively small up-front management fee and the right to take a share -- often 20 percent -- of future profits, known as carried interest. Industry advocates say that income should be treated like capital gains, because it depends on taking risks. But opponents, including Rep. Sander M. Levin, D-Mich., a sponsor of a House bill (HR 2834) to change that, argue it resembles ordinary income, because the firm managers are reaping profits from someone else's investments, not their own. There is no similar Senate bill, and Finance Committee Chairman Max Baucus, D-Mont., didn't commit to one during Wednesday's hearing. "Maybe the right answer is that there is a blend of services and capital income," Baucus said. Labor unions have encouraged Democrats to support the Levin bill, arguing that workers fare poorly when buyout firms take a company private and then shed jobs. Meanwhile, the private equity firms are rapidly expanding their lobbying presence in Washington and trying to build a broad coalition of business interests to oppose any changes to the rules. Ranking Republican Charles E. Grassley said critics should recognize that changing the tax treatment of carried interest would not be a tax increase, but a clarification of the differ

WASHINGTON - July 11: Eric Solomon, assistant secretary of the Treasury for tax policy, Peter R. Orszag, director Congressional Budget Office, Andrew Donohue, director of the Division of Investment Management at the Securities and Exchange Commission, and Kate D. Mitchell, managing director of Scale Venture Partners in Foster City, Calif., during the Senate Finance hearing on whether to raise taxes on the managers of private equity firms. Lawmakers are taking an intense look at the buyout...
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