Representative Sander Levin outlined a new proposal in his five-year effort to increase the tax rate that private equity managers and other investment executives pay on their so-called carried interest earnings.
The bill by the Michigan Democrat is similar to a proposal in President Barack Obama’s fiscal 2013 budget released yesterday. The administration estimates the change would generate $13.5 billion in additional taxes over the next decade.
“This loophole for years has unfairly enabled some of the highest-paid individuals in the country to sharply reduce their tax bills and it is time to close it once and for all,” said Levin, the top Democrat on the House Ways and Means Committee, in a statement.
Republicans object to the tax change, saying it would hurt economic growth. The House passed Levin’s proposal when Democrats controlled the chamber. It hasn’t advanced since Republicans took control of the House after the 2010 election.
Private equity managers are paid management fees and carried interest, which typically is a 20 percent share of the profits earned by their funds. The management fees are taxed as ordinary income, which has a top rate of 35 percent, and carried interest is considered a capital gain taxed at a top rate of 15 percent.
The preferential tax treatment of carried interest has benefited Republican presidential candidate Mitt Romney, who helped found and run Bain Capital LLC. Of the $21.6 million in income Romney reported receiving in 2010, $7.4 million came from carried interest, Ben Ginsberg, national counsel for Romney’s campaign, said Jan. 23 as Romney released his tax returns. Romney paid an overall 13.9 percent federal tax rate.
Levin said his new proposal would ensure that investment managers could continue to pay the capital gains rate for selling their stakes in their own companies.
The private-equity industry has resisted a tax change.
A tax increase “would discourage the risk-taking required to start, grow and save companies,” Steve Judge, president of the Private Equity Growth Capital Council, an industry trade group in Washington, said in a statement. Such proposals “have been defeated on a bipartisan basis a number of times over the last five years, and even with the highly charged election year rhetoric it is uncertain that such a proposal will gain traction.”
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