Carried tax studied by Senate

The Senate Finance Committee is scrutinizing a bill that could raise taxes paid by hedge fund managers and private equity heads. In a hearing today, Senator Charles Grassley of Iowa said that carried interest—the profit shares investment firm partners take, isn’t capital gains, but money received for performing a service—and should be taxed as such. Carried interest, which is treated as capital gains, is taxed at 15%, but if it were treated as income, rates could hit 35%. He also responded to criticism that the bill was an attack on the investor class. “It is about the definition of capital income versus labor income,” he said in an address to Senate Finance Committee chairman Max Baucus. “Capital gains arise from the sale of a capital asset. We know what capital assets are—they are shares of stock, real estate and other property held for investment,” he added. Meanwhile, Eric Solomon, Treasury assistant secretary for tax policy, pointed out that, unlike regular employees, hedge funds and private equity partners’ earnings are subject to business risks and are rewarded only for success. “The current tax treatment of carried interest provides certainty for taxpayers in planning their transactions and, at the same time, is administrable for the IRS,” he said. Current tax policy for carried interest also encourages the pooling of capital to promote entrepreneurship and risk taking, added Mr. Solomon.