Baucus And Orszag See ‘Growing Sense Of Inevitability’ For Ending Hedge Fund Manager Tax Break

Sens. Max Baucus (D-MT) and Chuck Grassley (R-IA), and OMB Director Peter Orszag

Sens. Max Baucus (D-MT) and Chuck Grassley (R-IA), and OMB Director Peter Orszag

Last year, the House of Representatives adopted a change (included in the Obama administration’s budget) that ends an inequity in the tax code enabling hedge fund and private equity managers to pay lower taxes on their income. Right now, the percentage of a fund’s proceeds that investors pay to the manager — called the “carried interest” — gets taxed as if it’s capital gains (at a 15 percent rate, instead of 35 percent), even though the manager doesn’t have any money at risk. It’s as if we treated movie proceeds given to a film’s lead actor as investment income.

This long overdue change has yet to be taken up by the Senate, as Senate Republicans have been adamantly opposed to it. “I think it will be difficult [to find 60 votes for the change],” said Sen. Chuck Grassley (R-IA). “A lot of hedge funds have gone belly up,” claimed Sen. Orrin Hatch (R-UT). “Frankly, this administration will raise any tax it can.”

However, Congress has a bunch of very popular business tax credits that it would like to extend, but the extensions need to be paid for, so the carried interest break is looking more likely to disappear. Senate Finance Committee Chairman Max Baucus (D-MT) said this week that there’s “a growing sense of inevitability” about the tax hike occurring, despite heavy lobbying from the financial services industry.

Office of Management and Budget Director Peter Orszag agreed yesterday, predicting that “you’re going to see a change in the taxation of carried interest pass the Senate within the next few weeks.” Orszag then took on the common conservative canard that the tax increase would stifle investment:

Mr. Orszag argued that Wall Street would adjust to a higher tax rate on carried interest, saying he was “unaware of any credible evidence that there would be any significant adverse effect from the increase in taxes”…Mr. Orszag asserted that past tax increases — from those on dividends, capital gains and the marginal income tax rates — did not lead to a big dip in investment and that changes in the tax treatment of carried interest would most likely have a negligible impact on investing.

Hedge fund managers make hundreds of millions of dollars (and often billions) annually. Does anyone really think they will suddenly slam on the brakes if they have to pay the same tax rate as the janitors who clean their offices?

The preferential treatment of carried interest is a bizarre fault in the tax code that only persists because of the power of the financial services industry and Republican resistance to any tax hike at any time. But sooner or later, Congress is going to have to start raising money somewhere, and treating carried interest for what it is — normal income — is a good place to start.


Citizens for Tax Justice released a report today pushing for the carried interest “loophole” to “finally be closed.”

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