Congress Eyes Private Equity Tax Issue
11.07.2007 16:03
Computers
- Source: Forbes
Technology industry representatives warned lawmakers on Wednesday that efforts to increase taxes on private equity funds could create a harmful ripple throughout the economy, drying up the capital that spurs innovation. Congress is debating whether to force private equity groups and hedge funds - and their managers - to pay more taxes, but a wide swath of industries, including venture capitalists, is concerned that the effort could affect all companies set up as limited partnerships. The issue gained prominence last month as Blackstone Group, one of the biggest private equity firms, went public, enriching its top executives. Private equity is a juicy target for lawmakers eyeing burgeoning federal budget deficits and seeking new ways to boost tax receipts. The National Venture Capital Association told senators that efforts to raise the tax rate for the private equity and hedge fund industries could have unintended negative consequences for similarly structured companies that helped launch Google Inc., Microsoft Corp. and other big technology players. Kate Mitchell, managing director of Foster City, Calif.-based Scale Venture Partners said venture capital firms invest in companies for five to 10 years or longer, adding that many venture-capital backed companies flop. "I can lose money in this business too," she said. The Senate Finance Committee is considering a proposal that would raise taxes from 15 percent to as much as 35 percent for private equity and hedge fund managers who take a share of their firms' profits, known as "carried interest." At the moment, carried interest is taxed as a capital gain, not income. A House bill introduced last month would raise taxes on private equity managers, while a Senate bill is more limited, affecting the partnerships themselves, but not their managers. Critics of the private equity industry, which has reaped enormous financial rewards in recent years, say that investment partnerships should not be allowed to pay taxes at lower rates than other Wall Street players such as investment banks Goldman Sachs Group Inc. and Merrill Lynch & Co. Sen. Max Baucus, D-Mont., the finance committee's chairman, questioned whether private equity managers should pay lower taxes than other wealthy people: professional athletes, high tech executives and lawyers working on contingent fees. "Are some people of great wealth merely taking advantage of the tax code to pay less than their full and proper share?" Baucus said. The committee's ranking minority member, Sen. Chuck Grassley, R.-Iowa, rejected criticism that lawmakers are attacking investors. "This issue is about closing loopholes, not raising taxes," he said. But a Bush administration official cautioned lawmakers against making big changes to tax rules that have promoted entrepreneurship for decades. Eric Solomon, the Treasury Department's assistant secretary for tax policy, said changing the law would affect big and small partnerships and make the tax code much more complicated. Copyright 2007 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed
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