Private equity executives and hedge fund managers are watching with trepidation President Obama's budget proposal to tax carried interest on their investment income.
As per the Wall Street Journal:
Taxation of carried interest is back on the agenda a bit sooner than many private equity executives had expected...
Private equity executives had expected this to be a non-issue at least for this year. They have said the government was focused on more urgent problems, and pointed out that there are unlikely to be any profits to tax for quite some time anyway, given the economy's problems and a lack of exits in the industry.
"When senior executives from Detroit came to Washington in a private jet, this has got much more traction than some of these arcane issues we're talking about, so I think that the pressure is off," David Lobel, co-founder of mid-market buyout firm Sentinel Capital Partners, said at a recent conference.
The New York Times explains:
The president will propose to tax the investment income of hedge fund and private equity partners at ordinary income tax rates, which are now as high as 35 percent and could return to 39.6 percent under his plans, instead of at the capital gains rate, which is 15 percent at most.
Senior Democrats in Congress joined with Republicans in 2007 to oppose that increase. But with Wall Street discredited and lucrative executive compensation a political target, the provision could prove more popular among lawmakers.
McClatchy predicts that many hedge funds will not even be around to endure the new tax proposal - and thus to benefit the government:
Some of the president's proposed budget-balancing measures raise eyebrows, however. For example, Obama plans to collect more tax revenue by raising the rate of taxation on hedge fund managers, who now enjoy a 15 percent tax rate.
They run private investment pools for the wealthy and are compensated on a percentage of their capital gains, or investment earnings. Obama wants to tax hedge fund managers at the corporate tax rate, but these funds are dropping like flies in today's twin banking and credit crises, and it's not clear how many will be around to tax when the crisis eases.