Part of the tax proposal announced by the Obama administration on Wednesday would shut down a controversial loophole that allows hedge fund managers and private equity executives to pay taxes at a lower rate than many working people.
The administration's plan seeks to close tax loopholes for corporations and individuals. At the same time the proposal would lower the corporate tax rate to 28 percent from 35 percent.
Hedge funds managers and private equity executives pay a different tax on their profits--which often comprise the bulk of their income --than most wage earners pay on their regular income. Hedge fund and private equity gains are taxed as “carried interest" at 15 percent. The Obama administration proposal would tax these profits at regular income rates of up to 35 percent.
“Currently, many hedge fund managers, private equity partners, and other managers in partnerships are able to pay a 15 percent capital gains rate on their labor income,” a relevant section of the proposal reads. “This tax loophole is inappropriate and allows these financial managers to pay a lower tax rate on their income than other workers.”
The administration’s move to raise the tax on hedge fund and private equity profits comes on the heels of similar proposals by U.S. legislators and international leaders. Last Tuesday, Congressman Sander Levin (D- Mich.) proposed a bill that would similarly raise the carried interest tax rate to regular income levels. And in recent weeks, some European leaders have reportedly been looking at ways to raise taxes on private equity profits as well.
The tax hike proposal also comes just one week after the Securities and Exchange Commission reportedly sent letters to a number of U.S. private equity firms announcing that it had launched an “informal inquiry” into how these firms value the companies they invest in.
The newfound regulatory interest in the way in which these firms do business, coupled with legislative pressure to raise their taxes, has sparked fears in the private investment industry that the sector could find itself the subject of a slew of new regulations.
As the head of one private equity firm, Stewart Kohl of Riverside Co. told The Huffington Post last week. "One day, we're going to wake up and there's going to be a set of laws regulations and restrictions that are going to make it difficult or impossible for us do what we do."