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Paulson: Don't Single Out Hedge Funds, Private Equity for Tax Hike

U.S. Treasury Secretary Henry Paulson said it would be unwise and dangerous to single out hedge funds and private equity when revising the tax code.

Speaking at the Wall Street Journal's Deals and Dealmakers Conference, which was shown live on CNBC.com, Paulson said proposals in Congress to boost the tax rate on hedge funds and private equity firms to 35% from 15% ignore the economic benefits of partnerships.

“(Partnerships) are a great structure to promote risk-taking and entrepreneurial spirit,” he said.

Paulson said partnerships are successfully used in real estate, energy and construction companies in addition to hedge funds and private equity. He said revising the tax code with while focusing only on the financial industry would be “dangerous.”

"There's a lot of focus today on tax rates for private equity and (hedge) funds," Paulson said. "I don't think it makes sense to single out one industry. It's not just hedge funds and private equity that organize themselve as partnerships...It does not make sense to single out one industry and make tax policy."

Tax Code Too Complex

He said the U.S. tax code is too complex and revisions must be made with an eye toward maintaining international competitiveness.

“I believe taxes should be low, fair and simple,” he said. “I’m more focused on simplification.”

Paulson said many people confuse income disparity and tax relief.

"The Bush tax cuts don't ahve anything to do with what's happening with income distribution," Paulson said. "The tax cuts have helped the middle class."

Earlier Wednesday, the Treasury Department said it was launching a review of the U.S. financial regulatory structure as part of its efforts to ensure the competitiveness of U.S. capital markets.

"To maintain our capital markets' leadership, we need a modern regulatory structure complemented by market leaders embracing best practices," Paulson said in a prepared statement.

The Treasury said it would release a "blueprint" for regulatory reforms by early next year.

The review will seek to "combine high standards of market integrity, stability and investor protection with a strong foundation for innovation, growth, and competitiveness," it said in a statement that offered few details.

Consolidation of Regulators

Possible moves could include consolidation of some regulators with overlapping responsibilities, such as the Office of Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS).

"The Department will examine the entire regulatory structure, with no predetermined outcomes," said Jennifer Zuccarelli, a Treasury spokeswoman.

On Wednesday, OCC chief John Dugan told Reuters that consolidating bank supervisors could make sense.

"I think anybody who looks at our system of four banking regulators, when they come on it anew, wonders whether this is the best way to approach things," said U.S. Comptroller Dugan.

Besides the OTS and OCC, the Federal Reserve Board and Federal Deposit Insurance Corporation have regulatory powers over banks.

The Treasury review is "perfectly appropriate and healthy," Dugan said. A spokesman for the OTS said the regulator would assist in Treasury's review. A spokeswoman for the Fed declined to comment and a spokesperson for the FDIC was not immediately available.

The review was one of a number of steps announced on Wednesday as a follow up to other Treasury-led initiatives launched in May.

The department said the President's Working Group on Financial Markets -- a grouping of top financial regulators led by Treasury -- would work with asset managers and investors to help formulate "best practices" for the hedge fund industry.

In addition, the department said it would seek to modernize Treasury's cash management and debt management systems, and push for completion of the Basel II rulemaking on capital requirements for large banks.

In May, Treasury unveiled other proposals for making U.S. capital markets more competitiveness by strengthening financial reporting and auditing procedures.

Zuccarelli said the modernizing effort is likely to live on past the term of Secretary Paulson but that the initiative should be part of his legacy.

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