CAMBRIDGE, Maryland Private equity managers should pay more in taxes to help fund a tax break for 160 million U.S. workers, a top Democratic lawmaker said on Thursday, taking a swipe at laws that helped Republican presidential hopeful Mitt Romney pay a 15 percent tax rate on much of his income.
Lawmakers are working to extend through the end of 2012 a payroll tax cut due to expire on February 29, with the main sticking point how to make up for lost revenues. Failure to agree on the extension would lead to increased taxes in an election year.
The issue became a public relations disaster for Republicans last month when U.S. House of Representatives Republicans squabbled over renewing the tax break. Democrats, sensing they have a political advantage, want to keep up the political pressure to extract more concessions.
Some Democrats have been looking at closing tax breaks enjoyed by the wealthy as a way of covering the approximately $170 billion cost of extending the payroll tax cut, unemployment benefits and preventing a reduction in payments to doctors participating in the Medicare healthcare plan for the elderly.
As House Democrats met on Thursday to plot election-year strategy, Representative Chris Van Hollen, a negotiator in the payroll tax-cut talks, raised the idea of increasing the 15 percent tax that specialty investors pay to cover the cost of renewing the tax break.
A portion of income earned by hedge fund and private equity managers is known as "carried interest" and gets treated as capital gains under the tax law. Many Democrats want carried interest to be treated the same as salary income and taxed at marginal rates of up to 35 percent.
Van Hollen, a prominent member of the House Democratic leadership, is the top Democrat on the House Budget Committee. He has served on a number of deficit-reduction committees, including the so-called budget "supercommitee" last year, and previously chaired the Democratic Congressional Campaign Committee.
Romney, one of the frontrunners for the 2012 Republican presidential nomination, is paying the 15 percent rate on much of his income, according to documents he released this week after succumbing to political pressure to provide more details about his multi-million dollar fortune.
Negotiations on how to pay for the payroll tax cut extension are in their early stages, with each side offering up controversial ideas that the other opposes. It is still too early to know what form any final deal will take.
"There's no reason there should be special rules and special tax breaks that apply to people that put none of their own capital at risk when people who are earning paychecks in manufacturing are paying much higher rates," Van Hollen told reporters, referring to carried interest.
Romney co-founded private equity firm Bain Capital and much of his estimated fortune of up to $250 million comes from profits made there. He earned about $42.5 million over the past two years, with about $13 million of that getting the carried interest tax treatment, according to his tax return for 2010 and estimated tax return for 2011 released on Tuesday.
It was not immediately clear how much support Van Hollen's proposal had among fellow Democrats, but a senior Senate Democratic aide left open the possibility of carried interest being part of any payroll tax cut deal.
Van Hollen also said cutting tax subsidies for oil and gas companies should be considered to fund the payroll renewal.
U.S. lawmakers passed a $33 billion bill last month to keep the payroll tax at 4.2 percent through February after weeks of partisan wrangling over how to pay for it. The tax had been scheduled to revert to its normal 6.2 percent rate on January 1.
(Reporting By David Lawder, Kim Dixon and Richard Cowan; Editing by Paul Simao)