U.S. House edges ahead on private equity tax hike

By Kevin Drawbaugh

WASHINGTON, Oct 24 (Reuters) - The U.S. House of Representatives was expected to inch closer on Thursday to raising taxes on the "carried interest" profits of wealthy managers of private equity firms and other investment funds.

In spite of heavy lobbying against it, a carried interest tax hike will be included in a wide-ranging tax bill scheduled to be unveiled by the House's top tax writer, Ways and Means Committee Chairman Charles Rangel, sources said on Wednesday.

The measure would more than double taxes on a big slice of the pay of some of the nation's richest financiers, but it looks like an uphill climb for final passage of the measure, with skeptics saying it will die in the Senate.

Rangel is expected to release a $1-trillion proposal aimed primarily at solving the fast-worsening problem of the alternative minimum tax (AMT), a levy initially aimed at the rich but increasingly hitting less well-to-do taxpayers.

To defuse the AMT time-bomb, Rangel will propose several steps, including cutting the top corporate tax rate, while raising revenues by ending some business tax breaks.

One would be to increase taxes on the 20-percent cut of gains, known as carried interest, kept by the top partners of private equity firms that buy under-performing companies, overhaul them and then sell them at a profit.

Private equity partners pay only 15 percent capital gains tax on carried interest. Rangel's measure would raise that to the income tax rate of up to 35 percent, a proposal put forward in June by the New York Democrat, with fellow Democrats Sander Levin of Michigan and Barney Frank of Massachusetts.

The Rangel proposal would also likely affect venture capitalist firms, real estate partnerships and the few hedge funds that make long-term investments, lobbyists said.