Industry Updates

U.S. carried interest tax gathers steam

Tuesday, May 25, 2010

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Opalesque Industry Update – The U.S. government’s plan to increase key tax on long term investments gathers steam as fund managers brace themselves for higher tax, expecting to pay more than double than what they usually do, media reports said.

Two lawyers, representing both sides in the debate on the carried interest tax, shared their view on CNBC Monday. Tom Curran, a securities lawyer and a partner at Peckar & Abramson, and a former New York County assistant district attorney, lambasted Congress and accused them of being “a bunch of drunken sailors who will tax anything.”

But Darryll Jones, an associate at the Florida A&M University College of Law and dean for research and faculty, defended the bill and dismissed the reservations of fund managers as “ridiculous.” He told CNBC: “I think it’s essentially restoring some integrity to the tax code. Some people who go to work, perform services, get taxed at up to 35%, and other people who go to work, perform services and get taxed at 15%.”

Under the proposed measure being pursued by the Democrats, carried-interest tax would significantly increase the income-tax rate on private-equity and hedge-fund managers. From the current 15%, fund managers will pay 35% for the first 75% of their income and 15% for the final 25%.

The proposed tax increase on carried interest is scheduled to rise to 20% in 2011. By 2013, three-quarters of carried interest would be subject to ordinary rates, which are scheduled to be more than 40%.

Proponents of the bill hope it would create jobs and help erase the 10% unemployment in the country. Indeed, charging income-tax rates on investment fund managers' carried interest, as opposed to the capital-gains rates they pay currently on those earnings is one of the possible money-raisers that would help provide tax-breaks for small businesses as well as federal unemployment insurance, said Market Watch. That provision would raise about $18.6bn over 10 years, according to CCH.

The bill is opposed by major U.S.-based multinational corporations and most prominently by private-equity firms, said Bloomberg.

House scheduled to debate broader tax measure today
The House is scheduled to debate the broader tax measure today, said Bloomberg, although the bill also faces some opposition in the Senate because it would add to the deficit.

Early last week, Democrats in the U.S. Senate remained divided over the carried-interest tax proposal, in contrast with the House which announced they were ready to introduce a revised bill, including the fund manager tax hike, reported Nasdaq.com.

On Thursday, Senate Finance Chairman Max Baucus and House Ways and Means Chairman Sandy Levins announced they had reached a deal on how to tax carried interest from hedge funds and private equity firms.

The proposal gained momentum after the Senate and the House released a summary of the bill, reported Reuters. However, the bill must still be ratified by at least 60% of the 100-member Senate.

The summary report was meant to be submitted to the Congress last Friday for review. If legislation reaches the full House floor, it presumably reflects provisions Levin believes can pass the Senate, said Reuters. The House has passed measures to increase taxes on fund managers before, but they were never approved by the Senate. However, the need to boost revenue, and public anger aimed at the financial industry may give the measure more momentum this time.
- Dumlao, Gravrand

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