Aug. 22 (Bloomberg) -- Congressional efforts to more than double taxes on managers of private-equity firms will generate little or no additional revenue to help pay for middle-class tax cuts that many lawmakers are seeking, a new study shows.

Buyout and venture-capital firms will restructure their affairs to sidestep any new tax laws aimed at their executives, according to the paper by Michael Knoll, a law professor at the University of Pennsylvania in Philadelphia.

At most, lawmakers may generate $3.2 billion a year in added revenue by raising levies on the share of profits, called ``carried interest,'' that executives receive as compensation for managing funds, Knoll wrote.

``Transactional structures are likely to change in response as tax rules change,'' he said in the paper, posted Aug. 16 on the Web Site of the Social Science Research Network, a repository of academic papers sponsored in part by the University of Chicago Graduate School of Business. ``Those changes are likely to reduce additional tax revenues.''

Knoll's study may be the first comprehensive, nonpartisan mathematical analysis of the fiscal effects of increasing taxes on so-called carried interest. It signals an uphill battle for lawmakers trying to raise the money needed to pay for eliminating the alternative minimum tax for about 23 million mostly middle-income households.

``What seems to some folks as an easy fix isn't quite as simple and clean and won't generate the kind of revenue they expect,'' said Drew Maloney, a principal at Ogilvy Government Relations, which was paid $3.7 million in the first half of this year to lobby Congress on behalf of Blackstone Group LP, a private-equity firm fighting a higher tax burden.

Rangel's Plans

House Ways and Means Committee Chairman Charles Rangel has said he plans to join a tax increase on fund managers with legislation to permanently wipe out the alternative minimum tax for most families as part of a package that will benefit 90 million households and withstand a presidential veto.

Rangel, 77, is a co-sponsor of legislation proposed by Michigan Democratic Representative Sander Levin that would tax carried interest -- typically 20 percent of a fund's profits -- as wages, a rate as high as 37.9 percent. That income is currently taxed at the 15 percent capital-gains rate.

Matthew Beck, a spokesman for Rangel, said yesterday that lower-than-anticipated revenue wouldn't dissuade the New York Democrat, who is convinced carried interest is a fee for service rather than a capital gain.

``We are looking into these issues as a basic issue of fairness in the tax code,'' Beck said.

Find Other Ways

About $200 billion is invested every year in private-equity funds, and between $12 billion and $17 billion in carried interest is granted, Knoll wrote. Taxing that carried interest as ordinary income would generate $2 billion to $3.2 billion in additional taxes annually, he said.

Private-equity firms probably would find ways to avoid the added tax burden, Knoll said. The firms may raise fees on wealthy individuals, who can deduct the higher fees, or shift costs to the companies in their portfolios, he said.

``For such companies, the payment of a contingent fee to a private-equity firm in exchange for its assistance in selecting the directors, hiring the managers, and helping to restructure and operate the business would likely qualify as an ordinary and necessary business expense'' that can be deducted from income, Knoll wrote. Such a strategy may generate ``little or no net increase in tax collections.''

Other Industries

Knoll, a lawyer and economist who has written extensively on corporate finance and income taxes, said in an interview that he was attempting to do a ``quick and dirty assessment of general numbers'' and intends to expand on it later this year.

Knoll said the paper was the product of independent research and wasn't funded by any group.

His paper dealt with private-equity firms and venture capital firms and didn't discuss other industries that also would be affected by such legislation, including hedge funds, real estate partnerships, and oil and gas partnerships. Raising taxes on those entities would generate additional revenue, although Knoll said he didn't have enough information to quantify the impact on those industries.

The paper also assumes that companies in the portfolios of private-equity firms would have a high enough effective tax rate to take advantage of deductions if the firms restructured their affairs and enough cash to pay carried interest, which experts said may not always be the case because such companies often have considerable debt.

Alternative Ways

Knoll didn't take into account earlier Rangel statements that he's willing to apply any tax increase to carried interest already on the books but not yet collected, a move that would generate as much as $85 billion in additional carried interest, which would bring in more tax revenue.

Retroactive application of any tax increase would ``be a big revenue hit,'' Knoll said, adding he doesn't support that. ``There is something troubling about making these changes ex- poste,'' he said.

Some experts have already told lawmakers about other potential ways to work around legislation targeting carried interest.

At a Senate Finance Committee hearing last month, Congressional Budget Office Director Peter Orszag said some fund managers may structure their carried interest as a loan from investors at below-market rates.

The law requires some tax to be paid on the value of the interest savings, but it would still be a savings compared with taxing carried interest as wages. The result, Orszag said, ``would result in treating carried interest somewhere between purely capital income and purely ordinary income.''

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net.

Last Updated: August 22, 2007 18:52 EDT