Bill would tax 'carried interest'

The lower capital gains tax rates now enjoyed by hedge fund and private-equity fund managers would be scrapped under a bill introduced today. If the bill is enacted, Investment managers who are paid “performance fees,” which are based on a fund’s profitability, would have to pay ordinary income tax on their fees. Currently, they pay a considerably lower 15% capital gains tax. Fourteen House Democrats, including Ways and Means Chairman Charles Rangel, D-NY, and Financial Services chairman Barney Frank, D-Mass., introduced the legislation. "Investment fund employees should not pay a lower rate of tax on their compensation for services than other Americans," said Rep. Sander Levin, D-Mich., one of the sponsors of the legislation. "These investment managers are being paid to provide a service to their limited partners, and fairness requires they be taxed at the rates applicable to service income just as any other American worker." Under the bill, any income received from a partnership, capital or otherwise, in compensation for services would be treated as ordinary income for tax purposes. The managers of investment partnerships who receive a “carried interest” as compensation would pay regular income tax rates rather than capital gains rates on the compensation. The capital gains rate would continue to apply to the extent that the managers' income represents a reasonable return on capital they have actually invested in the partnership. The Ways and Means Committee is scheduled to hold a hearing on the issue of tax fairness in July. The bill came as Blackstone Group's shares leaped more than 20 percent in the private-equity titan's $4 billion initial public stock offering.