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Dems Fighting Over Tax Loophole For Money Managers

First Posted: 05/19/10 12:43 PM ET Updated: 05/25/11 05:30 PM ET

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The Democratic effort to raise revenue for a jobs bill by closing a tax loophole that benefits money managers is running into opposition within the party itself as details are being worked out.

Two Senate Democrats, John Kerry (D-Mass.) and Maria Cantwell (D-Wash.), are pressing Finance Committee Chairman Max Baucus (D-Mont.) to treat certain fund managers different than others. Last week, Baucus agreed with House Ways and Means Chairman Sandy Levin (D-Mich.) that the "carried interest" loophole would be closed to pay for a jobs package of unemployment benefits, tax extenders.

The jobs bill promises to be a classic struggle between the haves and the have nots, which the Senate will debate once Wall Street reform is finished. It will pit money for job creation, unemployment benefits and health care subsidies for the jobless against special tax breaks for money managers. The Democratic in-fighting clouds the message the party is hoping to send.

The Senate is crafting its legislation this week and Democrats spent much of their weekly Tuesday lunch discussing the issue, said Sen. Patty Murray (D-Wash.), who added that no decision on details has been reached.

Murray has been lobbying for an exemption for venture capitalists and with Sens. Mark Warner (D-Va.), Jeanne Shaheen (D-N.H.), Bob Casey Jr. (D-Pa.) and Scott Brown (R-Mass.).

They're joined by Cantwell. "I think there's a difference in the business models between venture capital, people who do job creation and lose money for a whole long period of time, sometimes as many as 18 or 20 years, and people who just make money because they're financial engineers. I'm a little tired of the financial engineers, the people who are just making money off of money, telling everybody here what to do, versus people who actually make a product or a service," Cantwell told HuffPost.

Kerry is also pushing for changes. "I think there are some distinctions that ought to be drawn, personally," Kerry said. "There's a distinction between long-term, patient, capital formation, with risk, and things that are sort of masquerading as an investment that are fees. I think there's a distinction."

The carried interest loophole is a special tax deal for executives of investment partnerships, including real estate, private equity and some hedge funds, that currently allows those fund managers to receive their compensation as a long-term capital gain, which is only taxed at 15 percent, far below what they would pay otherwise in their tax bracket. Closing the loophole would still allow investors to pay the capital gains tax and is only targeted at people who pretend to be investors but are, in reality, being compensated for a task and being paid income.

Kerry said he has yet to threaten to vote against the bill. "I haven't gotten there," he told HuffPost. "We're working on trying to get the language."

Cantwell said she's pushing to make sure the Senate isn't railroaded by the House, which may be tougher on venture capitalists. "I'm just saying, before we get jammed by the House, are we going to get a vote? Do we get to have a discussion over here? Do we get to talk about it?"

The infighting among Democrats makes it harder for the party to slam Republicans for protecting hedge funds, a tempting political posture. And the GOP makes it easy. Asked on Tuesday about where Republicans stand on closing the loophole, the Senate's number two Republican, Jon Kyl of Arizona, debated whether, from a money manager's perspective, it would be considered a loophole at all.

"One could describe it as a loophole. Those people who work under that regime right now, I don't think they'd describe it as a loophole," he said.

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