August 15, 2007 / 9:02 PM / 12 years ago

New York's Schumer plans private equity tax bill

WASHINGTON, Aug 15 (Reuters) - New York Democrat Charles Schumer is preparing Senate legislation that would apply higher income tax rates to partnerships in all U.S. industries, not just private equity, a spokesman said on Wednesday.

Congress is considering several proposals that would more than double the taxes paid by senior executives of private equity firms that buy and sell companies.

The executives typically take a 2 percent fee on such transactions and keep 20 percent of the profits from major transactions, in an arrangement known as carried interest.

One of the bills would require managers of private equity firms and hedge funds to pay the higher income tax rate on carried interest rate gains instead of the current low capital gains tax rate.

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 (BX.N) did.

In either approach, the tax rate on PTPs or on carried interest would increase to as much as 35 percent, the top ordinary income tax rate paid by most Americans. Currently, the executives pay a capital gains tax rate of 15 percent.

“Senator Schumer is working on legislation to do exactly what he has said all along — tax carried interest at ordinary income rates across all industries,” spokesman Brian Fallon said.

“He prefers this approach because it is broader, fairer and will raise more revenue than targeting only publicly traded partnerships.”

Schumer, a member of the Senate Finance Committee, may introduce legislation when Congress returns in September, he said.

The bill would apply to “2-20” partnership structures widely used by real estate investment trusts, venture capital firms, and timber and energy businesses.

The private equity industry argues that carried interest is now 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.

Treasury Secretary Henry Paulson said last month he opposed a move by lawmakers to raise taxes on private equity managers, saying the present relatively low rate has promoted risk-taking and benefited the overall economy.

Congress is expected to take up the issue again when it returns from its summer recess in September.

Separately, the Service Employees International Union criticized private equity deals for reducing state and federal tax revenue and widening income inequality of workers.

“The way these buyout firms are doing business is cutting at the heart of the American economy,” Andy Stern, president of the labor union, told reporters. “We have not found one worker who has received health care as a result of the buyouts, or one worker who has received a raise.”

The union said it asked state governors to help it analyze the impact of private equity buy-outs on U.S. job losses, health-care coverage and pension fund investments. The SEIU estimates at least 10,000 layoffs have occurred this year at companies involved in private equity buyouts. (Reporting by John Poirier)

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