Obama seeks higher taxes on private equity

Copies of an overview of U.S. President Barack Obama's budget for fiscal 2010 are lined up on a table at the U.S. General Printing Office in Washington, February 26, 2009.

WASHINGTON (Reuters) - Taxes on the "carried interest" profits of corporate takeover financiers would rise sharply in fiscal 2011 under the long-range federal budget outline released on Thursday by President Barack Obama.

In a move that would hurt private equity and hedge fund managers, but not for at least two years, Obama's plan calls for increased federal revenues of $2.7 billion in fiscal 2011 from taxing "carried interest as ordinary income."

Carried interest is the main source of profits for partners in private equity firms, some hedge fund deals and other partnerships involving oil and gas, timber and real estate.

At present, the carried-interest system allows partners in such firms to take 20 percent of returns for putting in just 1 or 2 percent of their own money into a fund.

Carried interest is taxed at the 15-percent capital gains rate, not the ordinary income rate of up to 35 percent.

Wealthy hedge fund and private equity firm managers avoided a proposed carried interest tax increase in December 2007 after lobbying heavily against it to protect their business models.

Leaders of the U.S. Senate Finance Committee had proposed making carried interest taxable at the ordinary income tax rate for private equity firms that had floated on the market as publicly traded partnerships, or PTPs.

Firms that would have been hit by such a tax included Blackstone Group (BX.N) and Fortress Investment Group (FIG.N).

Asked why the Obama administration did not propose an immediate carried interest tax increase, a senior official at the U.S. Treasury Department said, "There is a general view that we are in a very, very serious recession right now."

He said Obama does not want to do anything that would raise revenues in 2009 and 2010.

The White House sent to Congress its budget request outline for fiscal 2010, which begins on October 1. A more detailed version of the budget will be available in April, and lawmakers will spend coming months debating and finalizing a government spending plan.

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(Reporting by Kevin Drawbaugh and Corbett Daly)