Business group backs carried interest tax break

By Kevin Drawbaugh

WASHINGTON (Reuters) - The largest U.S. business lobbying group said on Tuesday it will unveil a study showing how the economy would suffer if Congress closes what critics call a tax loophole for rich private equity fund managers.

The U.S. Chamber of Commerce said it will unveil on Wednesday the study examining "the detrimental economic impact of various 'carried interest' tax proposals."

Senate and House of Representatives committees have both scheduled hearings for Thursday on bills that would raise taxes on the "carried interest" pay of private equity fund managers.

"Most of the recent debate has centered on the direct effects that these legislative proposals will have on certain fund managers and has overlooked the consequences to other segments of the economy," the chamber said.

"The chamber study begins to examine the wider effects that the proposed changes will cause," it said.

Congress is considering bills to raise taxes on the senior executives of private equity firms, which buy out poorly performing corporations, overhaul them, and then resell them.

These executives typically keep 20 percent of the profits from their deals, in an arrangement known as carried interest. Under present law, carried interest gains are taxed at the 15-percent capital gains tax rate.

One bill in Congress would require private equity and hedge fund managers to pay the higher ordinary income tax rate of up to 35 percent on their carried interest gains.

Another approach would raise taxes on managers of private equity and other investment firms that go public as publicly traded partnerships (PTPs), as Blackstone Group did.

The private equity industry -- flush with cash and working hard to expand its clout in Washington through lobbying and campaign donations -- argues that carried interest is appropriately taxed at the capital gains rate.

Critics say private equity and hedge fund managers are unfairly exploiting a tax loophole that should be closed.

President George W. Bush said on August 9 that the proposed legislation could have the unintended consequences of hurting small business partnerships.

He said his administration was "very, very hesitant about trying to target one aspect of limited partnerships for fear of the spillover it'll have in affecting small business growth."