‘Carried Interest’ Tax Unlikely to Rise in ’07
By SARAH LUECK
November 6, 2007; Page A8
WASHINGTON — The Senate’s top tax writer said a tax increase on “carried interest” isn’t in store this year for private-equity and hedge-fund managers. But managers putting off paying taxes by stowing income offshore have more to worry about.
Increasing taxes on carried interest doesn’t have the necessary support to pass the Senate, said Sen. Max Baucus, the Montana Democrat and chairman of the Senate’s tax committee. Carried interest is a portion of fund managers’ pay that is taxed at the 15% capital-gains rate. A House proposal would tax carried interest as ordinary income, at rates as high as 35%.
However, Mr. Baucus said it is “not as difficult to pass” another proposal put forward by the House, which would limit hedge-fund managers’ ability to defer taxes on their compensation by holding the money offshore.
Mr. Baucus’s posture shows how Democrats are searching for politically palatable ways to raise taxes on some narrowly targeted groups in order to offset other tax cuts.
Congress identified high-paid private-equity and hedge-fund managers this year as a possible target, as lawmakers marveled at the size of their compensation and their ability to pay low tax rates on much of it.
Democrats Split Over Bill Affecting Backers
Tax Measure Targets Hedge Funds
By Jonathan Weisman
Washington Post Staff Writer
Wednesday, November 7, 2007; A01
In early June, as the Senate Finance Committee began examining how a new breed of Wall Street titan could be paying a special low tax rate on executives’ salaries, one of the richest of them, hedge fund manager Steven A. Cohen of SAC Capital Advisors, cut the Democratic Senatorial Campaign Committee a check for $28,500.
Just days later, with DSCC Chairman Charles E. Schumer (D-N.Y.) equivocating on legislation to raise taxes on publicly traded equity firms, hedge fund giant James H. Simons, who earned $1.7 billion last year at his Renaissance Technologies LLC, donated another $28,500 to the DSCC.
By late July, Schumer was off the fence — and on the side of the hedge funds and private-equity firms in opposing the Democratic legislation.
[. . .]
But the wealth of the Democrats’ target has proven to be a treasure trove for party fundraisers. Hedge funds and investment firms have been pouring money into Washington, contributing $11.8 million in the first nine months of this year to candidates, party committees and leadership political action committees.
That is more than the $11.3 million they gave in all of 2005 and 2006, according to the Center for Responsive Politics. More than two-thirds of that money has gone to Democrats.
Their contributions to congressional candidates, congressional campaign committees and congressional leadership PACs total nearly $4.8 million this year, well over the $3 million given in 2005 and 2006. Eighty-three percent has gone to Democrats, compared with the 53 percent they received in the last election cycle.
Cohen earned $900 million last year, according to the magazine Institutional Investor’s Alpha; he lives in a 32,000-square-foot mansion in Greenwich, Conn., with an indoor basketball court and a pool, and he owns some of the finest contemporary art in the nation. If his income breakdown is similar to the industry average, $180 million would have been subject to a capital gains tax of 15 percent, yielding $27 million. That is $36 million less than what he would have paid if the income were taxed as ordinary pay.
In the past two years, Cohen has given the DSCC $55,200, plus $24,450 in campaign contributions to Sen. Joseph I. Lieberman (I-Conn.) and $4,600 to Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), according to the Center for Responsive Politics. Both senators are undecided on the issue, their spokesmen say.
Simons, in earning $1.7 billion last year, was ranked as Alpha magazine’s highest earner for the second year in a row. The former Defense Department code breaker, who has a doctorate in mathematics, personally charges clients 5 percent of the funds they give him, plus 44 percent of the earnings on their investments. That is more than double the industry’s standard 2 percent management fee and 20 percent performance fee.
Democrats have spun that into gold of their own, according to the Center for Responsive Politics. Simons has donated $78,500 to the DSCC since 2005, $25,000 to the Democratic Congressional Campaign Committee and $25,000 to the Democratic National Committee. He also has given $10,000 each to the state parties in Michigan, Pennsylvania and Florida; $8,700 to Sen. Hillary Rodham Clinton (D-N.Y.); $6,500 to Dodd since last year; $4,600 to House Speaker Nancy Pelosi (D-Calif.); and $1,000 to Senate Majority Leader Harry M. Reid (D-Nev.), among others.
“People with large amounts of money will gravitate to the people in power,” said House Financial Services Committee Chairman Barney Frank (D-Mass.), a co-author of the House bill who has also received contributions from private-equity firms.
House Democratic Conference Chairman Rahm Emanuel (Ill.) agrees. He initially was skeptical of the bill, but last week he helped vote it out of the Ways and Means Committee. Emanuel even wrote the provision blocking offshore tax deferrals, knowing it was a direct challenge to one of his boosters, Citadel Investment Group of Chicago. Kenneth C. Griffin, Citadel’s founder, cleared $1.4 billion last year, and he has given $4,000 to Emanuel, along with $63,900 to the DCCC, which Emanuel headed.
But Frank cautioned that the fight has not been easy, especially for Schumer. “Hedge funds are to New York what tobacco has been to North Carolina. People don’t like to tax their constituents,” he said.
(via Patrick Hynes)