US Congressmen introduce carried interest bill

Sander Levin, a member of the US House of Representatives, today introduced a bill to force an “appropriate” ordinary income tax rate on carried interest.

The bill, a proposed amendment to the Internal Revenue Code of 1986, stipulates that investment managers in a partnership must pay ordinary income tax rates for income received related to the “performance of services”.

If signed into law, the bill would have a significant impact on the earnings of successful US general partners, who currently pay a 15 percent tax rate on carried interest income. The ordinary income rate applicable to most carried interest income would more than double to 35 percent.

The bill has the full support of the chairman of the US House Ways and Means committee, Charles Rangel and the chairman of the House Financial Services Committee, Barney Frank. Ways and Means is often described as the most powerful committee in Congress. Other backers from the committee Pete Stark, Jim McDermott, John Lewis, Richard Neal, Earl Pomeroy, Stephanie Tubbs Jones, John Larson, Earl Blumenauer, Ron Kind, and Bill Pascrell.

The bill reads: “[I]n the case of an investment services partnership interest. . . any net income with respect to such interest for any partnership taxable year shall be treated as ordinary income for the performance of services. . .”

In a press release announcing the bill, Levin said: “Congress must ensure that our tax code is fair.  We have to be sure that the lower capital gains tax rate is not being inappropriately substituted for the tax rate on wages and earnings. . . Investment fund employees should not pay a lower rate of tax on their compensation for services than other Americans. . . 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.”

Supporters of the current carried interest tax argue that tax treatment has traditionally been derived from the underlying nature of the income. In the case of carried interest, the partnership itself recognises a capital gain from the sale of an interest. The bill effectively enters the rules of a partnership and dictates that general partners pay a different rate because of the nature of their role in the partnership.

Ways and Means will hold a hearing on the topic of “tax fairness” in July, according to the announcement.

The introduction of the bill comes on the same day as The Blackstone Group’s IPO, the largest such offering in the US in five years.

In the Senate, senior members of the House Financial Services committee have introduced a bill that would prevent publicly traded partnerships focused on investment management from claiming an exemption from corporate income tax.

Mark Heesen, president of the National Venture Capital Association, issued the following statement in response to the carried interest bill: “The Bill proposed today by House Democrats to change the taxation of carried interest from a capital gains rate to an ordinary income rate is extremely concerning to the venture capital community. We assert that carried interest in the venture capital business model is a true capital gain and should continue to be taxed at that appropriate level.”

He added: “This proposed legislation could have far reaching, negative implications for the start-up community, venture capital investment, and the US economy. It is critical that legislators identify and fully comprehend the unintended consequences of this proposal as it could impact one of the country’s most important economic engines. We look forward to continuing a dialogue with members of Congress on this issue as the legislative process continues.”