Senate Said to Trim Tax Rise on Buyout-Fund Managers (Update1)
By Ryan J. Donmoyer and James Rowley
June 8 (Bloomberg) -- Senate Democrats are near agreement on a plan to scale back a House-approved tax increase on investment-fund managers as part of a jobs plan, a Senate aide said.
The Senate plan under discussion would tax fund managers’ profit shares at about 33 percent for assets held less than seven years, and about 31 percent for assets held longer than that, the aide said late yesterday.
The House adopted a tax rate of about 35 percent on May 28, with no special rates for long-term assets. Fund managers’ profit shares, known as carried interest, currently can qualify for the 15 percent capital-gains tax rate if they are generated by the sale of assets held longer than one year.
The House’s $115 billion jobs measure, approved May 28, would extend unemployment benefits, restore a package of tax cuts that otherwise would expire and increase municipal bond subsidies. The Senate aims to vote this week on its version of the bill.
The House plan would be partly financed by increasing the tax rate on carried interest, the share of profits paid to executives at buyout firms, venture capital funds and real- estate partnerships.
Lawmakers are under pressure to complete the legislation after allowing unemployment benefits for thousands to expire at the end of May while they debate the bill’s details. If Congress doesn’t act, the benefits of more than 320,000 people will be interrupted by the end of this week, according to the Labor Department.
Struggling Economy
Democrats, who control the Senate with 59 votes, must win the support of a handful of colleagues who criticized the carried-interest tax increase because they said it would lead firms to cut jobs while the economy continues to struggle.
The tax increase on carried interest would complete a three-year effort by House Democrats and labor unions to end what they view as a loophole in the tax code that allows executives at investment partnerships to pay capital-gains tax rates on the largest part of their compensation.
Other workers, including investment bankers, pay ordinary tax rates as high as 35 percent on their pay, including any exercised stock options.
“We think this is just a matter of treating income from managing investments as just that -- income for providing a service,” said Nicole Tichon, who tracks tax policy for the U.S. Public Interest Research Group, a Washington-based advocacy group.
Assume Risks
Trade organizations for private-equity firms, venture capitalists and real estate partnerships say fund managers should receive capital-gains treatment for their services because they assume risks and help build assets that eventually are sold for gains.
The Senate approach would create a blended tax rate. Beginning in 2013, 65 percent of such income would be taxed at the fund manager’s top ordinary rate, scheduled to be 39.6 percent. Thirty-five percent would be taxed at capital-gains rates, scheduled to be 20 percent in 2013. For carried interest attributed to assets held for more than seven years, 55 percent would be taxed at the ordinary rates, while 45 percent would get the lower capital-gains rate.
The House approach taxes 75 percent of the profit share as ordinary income and 25 percent as capital gains. In both bills, the split would be 50-50 for 2011 and 2012.
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