All carried-interest distributions from private-equity funds and hedge funds would be taxed as ordinary income instead of capital gains — thus more than doubling the tax rate of 15% — under the budget President Obama unveiled today, Treasury Department officials said.
The controversial provision, which has been discussed in Congress over the past several years and would start in 2011, would raise $2.7 billion in fiscal 2011 and $4.3 billion in fiscal 2013, one official said. Managers of hedge and private-equity funds traditionally have paid taxes at capital gains rates on carried interest, which is the share of a partnership’s earnings dished out to managers as an incentive to maximize the performance of the investment fund.
The senior officials briefed reporters at the Department of the Treasury on the condition that they not be identified by name.
The proposal would apply to all partnerships, including real estate, oil and gas, and all other types of partnerships.
“We made a decision that if you’re applying something like, this it should apply across the board, and not picking some industries versus others,” an official said.
The Obama budget “does not treat any particular industry different,” another official said. “If you have carried interest, it would be treated as ordinary income under our proposal.”
While this official acknowledged that high taxes could deter entrepreneurial activity, he said that higher taxes put in place during the Clinton administration also coincided with economic growth and productivity gains.
Meanwhile, the Obama budget, if approved by the Democratic Congress, would allow Bush administration tax cuts for couples earning more than $250,000 a year to expire as of 2011. That would mean the wealthiest would pay marginal rates of 39.6%.
The budget proposal also would raise capital gains and
dividend taxes on couples earning more than $250,000 to 20% from the current level of 15%, and it would make that change permanent.
The president also called for freezing the estate tax at 2009 levels, which allows an exclusion of $3.5 million per person from estate tax. Under current law, the estate tax is scheduled to be eliminated in 2010 but would then go back into effect in 2011.
