News & Analysis

Senate ramps up GP tax review

A proponent of a tax hike on carried interest has been invited to make a presentation before US lawmakers, according to a report.

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Max Baucus, the chairman of the US Senate’s finance committee, told reporters today that his committee is weighing potential changes to the taxes on private equity funds.

He declined to say whether the investigation would eventually lead to new legislation. 

Reuters reported that Baucus, a Democrat from Montana, said, “We’re trying to do what is right here.”

General partners are worried that momentum is building in the US capital toward recharacterising carried interest as ordinary income, as opposed to capital gains. The former carries a tax rate of as much as 35 percent while the latter is only 15 percent.

Chuck Grassley, a senator and ranking member in the finance committee, has also reportedly expressed interest in reviewing the tax applied to private equity.

The Reuters report said the committee had invited Victor Fleischer, a University of Colorado professor, to join a closed-door session on Monday. Fleisher is the author of “Two and Twenty: Taxing Partnership Profits in Private Equity Funds”, which argues that carried interest should be taxed at a higher rate. A recent New York Times editorial cited Fleischer’s research in calling for changes to the way GPs are taxed.

One excerpt from Fleischer’s paper reads: “Ironically, while the public and the media have focused on ‘excessive’ pay for public company CEOs, the evidence suggests that they are missing out on the real story. Almost nine times as many Wall Street managers earn over $100 million as public company CEOs; many of these top-earners on Wall Street are fund managers. And they pay tax on much of that income at a 15 percent rate, while the much-maligned public company CEOs, if nothing else, generally pay tax at a 35 percent rate.”

Douglas Lowenstein, president of the new Washington DC lobbying group Private Equity Council, told Reuters: “My sense is that they are seriously considering the issue and they are engaging in a fact finding inquiry.”

Currently no open hearings are scheduled in the Senate to discuss the private equity tax issue.