Democrats Seek Higher Tax on Hedge Fund, Private Equity Managers

Powerful House Democrats on Friday proposed increasing the tax burden on managers of hedge funds and private-equity firms, racheting up the debate on expanding the government's tax grip on Wall Street.

The bill came as Blackstone Group's shares rose sharply in the private-equity titan's $4 billion initial public stock offering, the sixth-richest IPO in U.S. history.

Managers who take a share of hedge fund and private-equity fund profits pay taxes at a 15% rate, the rate for capital gains. The legislation would hike the rate levied on their compensation, known as "carried interest," to 35%, the level for income tax.

The legislation was introduced by Reps. Sander Levin of Michigan, a member of the Joint Committee on Taxation; Charles Rangel of New York, head of the tax-writing Ways and Means Committee; Barney Frank, the Financial Services Committee chairman, and a host of other Democrats.

Rep. Levin told CNBC’s “Power Lunch” that his new tax bill seeks to create fairness and is not aimed at private-equity companies."

This is part of our effort to make sure that there's equity in our tax structure," the Michigan Democrat said Friday.

"I don't think we want economic growth on the basis of unfair taxes,” Levin said.  “How do I go to Michigan and someone who is providing services and they're paying ordinary income tax and then they say to me that someone who is in a management company is being paid not for cash they put into the company but because of their services and they're being charged half the tax (rate). How do you give that answer? I want to foster economic growth. It needs to be done within a structure of fairness and that's what this is all about. There's no pile on.”

A swirl of publicity in recent weeks over the billions that Blackstone chief executive Stephen Schwarzman is reaping from the IPO provided a backdrop for lawmakers' expressions of outrage and legislative moves as they target new sources of revenue. Last week, the leaders of the Senate Finance Committee proposed legislation that would raise the tax burden of private-equity firms like Blackstone and hedge funds that go public.

The new House bill would apply to managers of all such investment funds.

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