Industry Groups Warn Against Tax Hike

Congress is debating whether to force companies set up as limited partnerships -- and their managers -- to pay taxes at the same rate as income earned by ordinary Americans. Proposed legislation would raise taxes from 15 percent to as much as 35 percent for profits earned by private equity and hedge funds, and fees paid to their managers.

Though private equity groups and hedge funds could be tempting targets for lawmakers looking to pay for new federal programs, the industry has been lobbying aggressively against the tax hike and key senators appear to be heeding their concerns.

Several senators said they are interested in a more comprehensive look at tax reforms, with the possibility of hiking income tax rates for the wealthy. Some also are worried about the impact that a tax hike on private equity and hedge funds would have on pension funds that pour their money into those investments.

Sen. Christopher Dodd, a Connecticut Democrat who chairs the Senate Banking Committee, said Tuesday that while he has not taken a position on the issue, he was "concerned about the potential adverse effects" on financial markets.

Advocates of hiking taxes say it is unfair for private equity, hedge fund and venture capital fund managers to pay a smaller share of their earnings in taxes than lawyers, doctors or professional athletes. But industry executives say taxing those companies as a lower-rate promotes risk-taking and economic growth.

The issue gained prominence last month as Blackstone Group, one of the biggest private equity firms, went public, enriching its top executives.

At Tuesday's Senate Finance Committee hearing, Bruce Rosenblum, managing director of the Carlyle Group, a Washington-based private equity giant argued that changing the tax treatment for private equity managers will have adverse consequences.

"There will be deals that don't get done. There will be entrepreneurs that won't get funded and turnarounds that won't get undertaken," said Rosenblum, who also is chairman of the Private Equity Council, an industry group.

However, Denver venture capitalist William Stanfill disputed this argument, saying his colleagues have displayed a "chicken little" mentality in warning of dire consequences. He noted that venture capitalists are paid very well compared with other industries.

"We get ample compensation -- financial and psychic -- from the work that we do and the risks that we take with other people's money," Stanfill said.

It makes little sense to tax teachers, CEOs or surgeons at a higher rate than private equity executives, said Joseph Bankman, a law professor at Stanford University. In fact, he said, lower taxes for private equity firms and fund managers distort incentives for college students deciding what career to pursue.

"Our economy works best when we have the same tax rates," among all industries, Bankman said.

Adam Ifshin, president of shopping center owner DLC Management Corp. of New York, said the tax change would pose a sweeping and destructive impact on real estate investment, particularly in downtrodden cities and poor urban neighborhoods.

"Real estate development involves substantial risks and the reward on the back end is what makes that risk worth taking," he said. "Many of our projects are not short-term in nature."

Sen. Charles Schumer, D.-N.Y. questioned whether the tax hike would raise enough money to pay for new education, health care or tax relief efforts and said he was concerned about the impact of a tax hike on New York's hedge fund and private equity industries.

The estimated $4 billion to $6 billion that would be raised in a House bill wouldn't be enough to protect middle-class taxpayers from having to pay the Alternative Minimum Tax, a parallel tax system designed to cover only the wealthy, Schumer said.

AP Business Writer Marcy Gordon contributed to this report.