Van Hollen Calls for End to Hedge-Fund Break to Help Fund Payroll Tax Cut

Chris Van Hollen, the top Democrat on the House Budget Committee, said Congress should eliminate a tax break for private-equity and hedge-fund executives to pay for extending a payroll tax cut for workers.

“It’s an inequity in the tax code, and it needs to be fixed,” Van Hollen, of Maryland, said on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend.

“If you look at a lot of the hedge fund activities, these are people who are not putting their own capital at risk,” he said. “They are getting a special deal that is not available to other people in the economy.”

Tax fairness has become an issue in the 2012 presidential campaign. Mitt Romney, Republican front-runner and co-founder of Boston private-equity firm Bain Capital LLC, probably has benefited from a break that allows private-equity executives to receive much of their compensation as carried interest -- treating what would be ordinary income for other service providers as capital gains, taxed at 15 percent. Ordinary income currently is taxed at rates as high as 35 percent.

Romney, reporting a net worth of between $190 million and $250 million in an August disclosure form filed at the Federal Election Commission, has said his effective tax rate is probably about 15 percent because his income comes overwhelmingly from past investments. In debates this week, he has said he probably will release some personal income tax returns in April.

Ending the Tax Break

Ending the tax break would affect general partners in private equity and hedge funds, who may or may not contribute capital to the firm and get most of their earnings as a share of the profits from the assets under management. It would also affect profits-based compensation of real estate investors and venture capitalists.

Van Hollen said both leaders in the race for the Republican presidential nomination have weaknesses.

Romney, who won the New Hampshire primary election, has a “major” vulnerability in the sense voters have “that he’s just out of touch,” Van Hollen said. “He made a big mistake trying to argue he was a job creator. What he was, was a guy who tried to maximize return for his investors, mostly very wealthy investors. That’s fine; that’s what he’s supposed to do.”

Newt Gingrich

Newt Gingrich, the former House speaker, has “taken every different position on the map” and “has obviously been an unsteady hand,” Van Hollen said. “You don’t know what he’s going to say two hours from now.”

For President Barack Obama to win a second term in November, voters need to have a sense the economy and the rate of joblessness are improving, Van Hollen said. The unemployment rate fell to 8.5 percent in December from 8.7 percent in November.

“We’ve had some relatively good news recently,” he said. “However, we all know there’s still a lot of uncertainty in the economy.”

Van Hollen said he’s not optimistic Congress will accomplish much this year ahead of November’s elections and blamed Republicans for turning back most of Obama’s proposals to create jobs.

“I certainly hope we can complete the job on the payroll tax cut,” Van Hollen said.

After a standoff between Democratic and Republican lawmakers, Congress agreed in December to extend the 2 percentage point cut in the payroll tax for two months.

Impasse on Funding

It is now set to expire Feb. 29. A bipartisan congressional committee is looking at how to resolve an impasse over how to pay for extending it through 2012. Panel members plan to meet for the first time Jan. 24.

Van Hollen said he doesn’t know if Republicans will agree to a further extension.

“A lot of them have been on record in the past not wanting to do a payroll tax cut,” he said. “The question is going to be whether they try and add all these extraneous provisions.”

The parties remain far apart on where to find about $150 billion to pay for the tax break for workers. Democrats support a surcharge on millionaires, while Republicans have proposed raising Medicare premiums for wealthier seniors, reducing aid to the jobless and extending a pay freeze for federal workers.

Van Hollen said ending the carried-interest breaks should be part of that debate.

Ordinary Income

Obama has proposed taxing carried interest as ordinary income, saying it would raise $18 billion over 10 years, as a way to pay for a $447 billion job-creation plan he released in September. Republicans have opposed the change, and proposals by congressional Democrats to raise the tax on carried interest have failed in the past.

On the issue of health care, Van Hollen said Americans would suffer if the U.S. Supreme Court throws out Obama’s health-care overhaul that was signed into law in 2010.

“There are a lot of people who have already begun to benefit from some of the patient-protection provisions in the health-care bill that all of a sudden would realize that it meant more to them than they realized,” he said.

To contact the reporter on this story: Catherine Dodge in Washington at cdodge1@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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