David Rubenstein, co-founder of Carlyle Group Inc., said he expects the U.S. Congress will review the favorable tax treatment of profit-based compensation for private equity managers next year.
“The carried interest debate is likely to be resolved in the next Congress in the context of comprehensive tax reform,” Rubenstein said today at a Washington conference sponsored by the Council for Institutional Investors, a group representing employee benefit funds, foundations and endowments with combined assets exceeding $3 trillion, according to its website.
Carried interest is the share of profits taken as compensation by private-equity managers, real estate investors and members of oil-and-gas partnerships. The payments, designed to give money managers incentive to improve fund performance, are taxed at the capital gains rate of 15 percent rather than the rates as high as 35 percent that apply to wages.
The tax treatment of private equity has gained attention in part because of former Massachusetts Governor Mitt Romney’s bid for the Republican presidential nomination. Romney, a co-founder of Bain Capital LLC, said in January that he paid an effective tax rate of 13.9 percent on income of $21.6 million.
“When you have an inequity in the system as we do now, it’s not good for the country as a whole,” Rubenstein said at the conference. “So yes, there are inequities that should be dealt with.”
Rubenstein, one of three Carlyle founders who received a total of $413 million last year, declined to say how treatment of carried interest should be changed. He said it is unfair to criticize private equity managers for the tax rates they pay.
“I pay what I’m supposed to pay,” he said. “Change the law and I’ll pay whatever I’m supposed to pay.”
Representative Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee, introduced legislation in February that would tax carried interest as ordinary income.