Rangel Seeks $48 Billion Hedge Fund, Buyout Firm Tax

Date: Thursday, October 25, 2007
Author: Ryan J. Donmoyer and Alison Fitzgerald, Bloomberg.com

House Ways and Means Committee Chairman Charles Rangel said he will propose a $48 billion tax increase on executives of hedge funds and private-equity firms to help pay for curbing another tax this year.

The New York Democrat said the proposal would more than double the tax rate on so-called carried interest, the compensation that executives at buyout and venture-capital firms, as well as real estate and oil and gas partnerships, receive for managing investments. It also would require hedge-fund managers to pay tax on income they defer in offshore accounts, he said.

The so-called patch to the alternative minimum tax, which lawmakers must pass this year to forestall a tax increase on 21 million households, will set up a showdown between Democrats who want to offset the lost revenue with new levies and Republicans who oppose any increase. The carried-interest measure also will be part of a broader overhaul that contains a permanent repeal of the minimum tax, a tax-rate surcharge on wealthy households and a lower corporate rate.

Rangel, 77, laid out his plans yesterday to the tax-writing Ways and Means Committee. ``I didn't get a lot of responses, though,'' he said. Rangel plans to introduce the broader measure today and the one-year stopgap bill next week.

After the half-hour meeting, Louisiana Representative Jim McCrery, the ranking Republican on the panel, said he didn't know all the details of Rangel's plan, though had heard enough ``to know that I can't support the bill.''

`Mother of All Reforms'

Rangel said the broader measure, which he has called the ``mother of all reforms,'' would contain a 4 percent tax-rate surcharge on adjusted gross income over $200,000 for married couples. The surcharge would rise to 4.6 percent for those with income of more than $500,000. In addition, households with income of more than $200,000 would have to pay rates as high as 19.6 percent on capital gains and dividends, instead of the current rate of 15 percent.

That provision alone would raise $831.7 billion, more than enough to cover the cost of eliminating the minimum tax, Rangel said. Even with the surcharge, most taxpayers who earn between $200,000 and $500,000 will pay less than they would under the AMT, he said.

The overhaul, which he said wouldn't be voted on this year, also lowers the corporate tax rate to 30.5 percent from 35 percent. To pay for that $363.8 billion tax cut, the proposal would repeal a special 32 percent tax rate for manufacturers and disallow the ``last-in, first-out'' accounting method that reduces taxes for businesses such as oil companies, wholesalers and automakers that hold inventory.

Social Security, Medicare

The proposal also imposes $9.4 billion in Social Security and Medicare taxes on lawyers, accountants and others who currently avoid them by organizing as a partnership. It would also raise $4.3 billion in taxes from investors by requiring stock purchase prices to be reported to the Internal Revenue Service beginning in 2009 and all other types of securities beginning in 2011.

Overall, Rangel said his measure would cut taxes for 90 million U.S. households by letting more poor families claim the $1,000 per child tax credit, doubling the earned income-tax credit for the working poor, and boosting the standard deduction by $850 to $11,550.

About two-thirds of Americans currently claim the standard deduction, according to IRS data. Those three provisions combined would save taxpayers $86.2 billion over the next decade.

The overhaul also would force U.S.-based multinationals such as Fairfield, Connecticut-based General Electric Co. to repatriate foreign earnings in order to maximize interest deductions and adds new penalties for companies using tax shelters that have no economic or business purpose. It would also impose $20.7 billion in new taxes on many mergers and acquisitions by extending the period intangible assets such as goodwill can be amortized by five years to 20.

`Tax Hikes'

Republican leaders, in a statement, denounced the proposal as the ``mother of all tax hikes,'' saying it boosted taxes by $1 trillion over 10 years.

Dorothy Coleman, vice president of tax policy for the National Association of Manufacturers, said her organization views the bill as the start of a longer debate. She said it wasn't clear whether her group's members would be willing to accept the lower corporate rate proposed by Rangel in exchange for the loss of deductions worth more than $330 billion over the next decade.

``At first blush, the revenue raisers are things that raise a lot of concern around here,'' she said. She said the members of her Washington-based group, which represents a range of companies from Santa Clara, California-based Intel Corp. to Kansas City Power & Light Co., especially object to the proposal to increase taxes on U.S. businesses that operate overseas.

Refund Delays

Congress is under pressure to pass a one-year minimum tax fix in the next two weeks. If the temporary measure is put off past early November, as many as 50 million tax returns will be delayed and millions of taxpayers will be forced to wait longer for refunds.

The one-year fix will cost about $48 billion. Rangel said it would be funded through the carried-interest provision, which would raise $25.7 billion over 10 years, and the new tax on offshore deferred compensation, which would bring in $22.7 billion over that period. Buyout firm executives currently pay the 15 percent capital gains rate on carried interest. Under Rangel's plan, that would increase to a rate as high as 37.9 percent.

NASCAR Tax Break

The stopgap measure would also renew for one year about three-dozen narrow tax breaks expiring this year, ranging from a $9 billion research credit for businesses and a $3.6 billion deduction for state sales taxes to breaks for restaurants, NASCAR, teachers, and companies that employ American Indians.

Treasury Secretary Henry Paulson added urgency to the debate this week by declaring that any tax changes should be made before Nov. 7 to give the IRS time to print forms and reprogram computers to reflect the change. All forms and computer programs reflect current law, which assumes the minimum tax will take effect, he said.

The minimum tax, originally aimed at the wealthiest Americans, now affects taxpayers with incomes as low as $50,000. If it's not curbed, 21 million households will see their 2007 taxes rise by an average $2,000, Paulson said.

By proposing increases that mostly affect wealthy taxpayers to pay for legislation to limit the reach of the minimum tax this year, Rangel is turning the tables on Republicans and the Bush administration, which have increased pressure on Democrats to waive Congress' pay-as-you-go budget rules. Those rules require any new spending to be offset by new revenue or spending cuts.

Senate Showdown

Rangel's proposal also forces the Senate to consider raising taxes on executives of buyout firms, hedge funds, real estate partnerships, and venture capitalists this year. Majority Leader Harry Reid said in July that he was inclined to postpone that debate until 2008.

``This has set up a showdown between the House, which wants to pay as you go, and the Senate, which wants to pay when you're gone,'' said Clinton Stretch, managing principal in charge of tax policy at Deloitte and Touche LLP in Washington.

Republicans, including McCrery and Senator Charles Grassley of Iowa, are pushing Rangel to waive the budget rules to pay for curbing the minimum tax this year. Rangel reiterated this week that he opposes waiving the budget rules, saying he won't ``borrow'' money to fund the patch.

In a show of confidence that his measure would pass, he also said he had advised the IRS that it can assume the patch will be extended.

The minimum tax ``is an increasingly huge middle-class provision,'' said Representative Sander Levin, a Michigan Democrat who serves on the panel. The bill ``pays a lot of attention to the middle-income taxpayers of this country.''

To contact the reporters on this story: Alison Fitzgerald at afitzgerald2@bloomberg.net ; Ryan J. Donmoyer at rdonmoyer@bloomberg.net