WASHINGTON (Reuters) - New York Sen. Hillary Clinton, the Democratic presidential front-runner, on Friday urged closing a tax “loophole” that she said unfairly benefits a few top Wall Street financiers.
Clinton joined other lawmakers in a push to raise the tax rate on “carried interest” gains made by senior partners in the booming private equity and hedge fund businesses.
“It offends our values as a nation when an investment manager making $50 million can pay a lower tax rate on her earned income than a teacher making $50,000 pays on her income,” said Clinton in a campaign statement.
“As president I will reform our tax code to ensure that the carried interest earned by some multimillionaire Wall Street managers is recognized for what it is: ordinary income that should be taxed at ordinary income tax rates.”
Two other Democratic presidential hopefuls — John Edwards, a former senator, and Illinois Sen. Barack Obama — have also expressed support for raising the carried interest tax.
“We’re glad to see Senator Clinton has joined us. We hope the other candidates will join in our efforts to ensure hedge fund and private equity managers making hundreds of millions a year no longer pay taxes at a lower rate than their secretaries,” said Edwards spokesman Eric Schultz.
Obama said in a statement, “We need to close the loophole that allows managers at some large hedge funds and private equity funds to unfairly cut their tax bills more than in half by treating regular service income as capital gains.”
The candidates’ remarks came as Congress is considering several bills that would sharply raise tax rates on some of the financial world’s most secretive and savvy professionals.
Carried interest is the 20 percent cut of profits above targeted returns that is typically kept by private equity and hedge fund managers on major transactions. It is a key source of the vast fortunes some of them have amassed in recent years as they have become powerful players in the global economy.
Under present law, these investment managers are allowed to pay 15 percent capital gains tax on carried interest, not the 35 percent top ordinary income tax rate.
The attention of Congress has focused on these investment managers since last month’s $4.13 billion initial public offering by private equity firm Blackstone Group.
Blackstone co-founders Stephen Schwarzman and Peter Peterson pocketed more than $2.4 billion between them on the IPO, which showered hundreds of millions of dollars more on the firm’s senior members. It was the largest U.S. IPO since 2002.
Legislation being considered in the Senate and in the House of Representatives would sharply raise taxes on private equity firms and possibly hedge funds as well.
One approach favored by some lawmakers would boost taxes on certain investment management firms that go public as publicly traded partnerships, as Blackstone did. Another plan would specifically raise taxes on carried interest.
In both approaches, the tax rate would go up to as much as 35 percent from the current rate of 15 percent.
Clinton, like many politicians from both parties, has received campaign contributions in the past three years from some of private equity’s top managers.
Some of her supporters include leaders of firms such as Bain Capital, Clayton Dubilier & Rice, Silver Lake Partners and Warburg Pincus, according to campaign finance records compiled by the Center for Responsive Politics.
“Don’t get me wrong,” Clinton continued, “private equity and venture capital play important roles in our economy.”
But she said: “We can close this loophole that unfairly benefits some of the best paid people in America, while continuing to encourage investment in innovative, young companies. This is common-sense, pro-fairness tax reform.”