Funds News

Sen. Schumer draws line on private equity taxes

WASHINGTON (Reuters) - New York Sen. Charles Schumer said on Wednesday that Congress is right to look at the wealthy in considering possible tax hikes but that he “will not stand for” raising taxes on private-equity firms and hedge funds while leaving other partnerships alone.

A street sign on Wall Street outside the New York Stock Exchange in New York April 18, 2007. The new kings of Wall Street -- as the managers of booming private equity and hedge funds have been dubbed in the business press -- will come under unaccustomed scrutiny on Wednesday before the U.S. Congress. REUTERS/Eric Thayer

The Democrat, whose constituency includes Wall Street, made his remarks at a Senate Finance Committee hearing focused on whether taxes should be raised on the gains of private-equity firms and hedge-fund managers.

Bills have been filed in both the Senate and the House of Representatives that would do just that. At three separate public hearings on Wednesday, legislators tackled the issue, as well as questions about risks to the economy posed by hedge funds.

The hearings came as lawmakers have begun asking whether the secretive and super-rich leaders of private-equity and hedge funds pay enough tax and whether the Bush administration does enough to protect the economy and investors from them.

Under one approach favored by some lawmakers, taxes would be raised on private-equity firms or hedge funds that go public as publicly traded partnerships (PTP), as Blackstone Group recently did in a $4.13 billion public stock offering.

Another approach would raise taxes on “carried interest” -- the 20 percent cut of profits beyond targeted returns typically kept by senior managers of private-equity and hedge funds.

Carried interest is a key source of the vast fortunes amassed by some of these billionaire financiers in recent years as they revolutionized the U.S. financial system.

In both approaches being considered in a handful of bills, the tax rate on publicly traded partnerships or on carried interest would go up to as much as 35 percent from the current rate of 15 percent.

At the Senate Finance Committee hearing, Schumer said that strict new “pay-go” budgeting rules being followed by Democrats since winning control of Congress meant new tax revenues are needed for important domestic programs.

He said, “If we must raise revenues, the likely and logical place to do it should be at the very highest end of the income scale, where average tax rates have actually been declining.

“Wealth and income have been agglomerating to the very richest in our economy at an amazing rate.”

On the other hand, he said, he does not want to stifle entrepreneurship and feels it is crucial to preserve the world financial leadership of New York and the United States.

“I will fight as hard as I can to protect the interests of New York,” he said, adding that he does not want financial partnerships singled out for higher taxes than other partnerships such as oil and gas, venture capital or real estate.

“I will not stand for treating financial-services partnerships one way while all the other partnerships are treated another way,” he said.

The Finance Committee hearing addressed both approaches under consideration -- carried interest and publicly traded partnerships.

Committee Chairman Max Baucus said he wants to find out “whether some people who are earning great wealth are also avoiding their full and proper share of the burden of taxation.”

The Montana Democrat added: “There is also a good argument that the fund managers who are becoming publicly traded partnerships are stretching the law.”

A senior U.S. Treasury Department official urged caution on possibly changing taxation of hedge funds and private equity.

“We must be cautious about making significant changes to partnership tax rules that have worked successfully to promote and support entrepreneurship for many decades,” said Treasury Assistant Secretary for Tax Policy Eric Solomon.

A House Financial Services Committee hearing looked into systemic economic risks that may be posed by hedge funds.

Committee Chairman Barney Frank, a Massachusetts Democrat, told reporters he planned to offer legislation requiring hedge funds to retain trading data and other documents that could be used by regulators in enforcement cases.

Later on Wednesday, a hearing before the House domestic policy subcommittee focused on small investors’ exposure to hedge-fund risk and the Blackstone IPO.

Separately, the U.S. Securities and Exchange Commission voted to adopt a rule to protect investors from hedge-fund advisers who make false or misleading statements. The SEC is also considering a rule requiring any hedge-fund investor to hold at least $2.5 million in investments to ensure they are capable of “evaluating and bearing the risks.”

Additional reporting by Karey Wutkowski, David Lawder and Rachelle Younglai