Fund Managers Bracing for Higher Taxes


It was a midday “throw-down,” or shouting match, between two lawyers at opposite ends of the carried-interest debate, as they gave their views on CNBC Monday.

“I’m at the point where I’m ready to call it all lies,” said Darryll Jones, an associate at the Florida A&M University College of Law and dean for research and faculty. “What the fund managers are putting out is ridiculous.”

“They’re [Congress is] a bunch of drunken sailors: They’ll tax anything,” said Tom Curran, a securities lawyer and partner at Peckar & Abramson, and a former New York County assistant district attorney.

Under discussion was a proposed change in the carried-interest tax that would significantly increase the income-tax rate on private-equity and hedge-fund managers.

Currently, they pay 15 percent, the capital-gains rate. Their tax bill, if the proposal becomes law, would rise to 35 percent for the first 75 percent of their income and 15 percent for the final 25 percent of their earnings.

CNBC's David Faber reports some firms are scrambling to figure out ways to avoid reductions in their managers' compensation, if and when the higher tax rate is enacted.

The extra revenue from the carried-tax change is earmarked to underwrite some unemployment benefits and would take effect in 2013.

“I think it’s essentially restoring some integrity to the tax code. Some people who go to work, perform services, get taxed at up to 35 percent, and other people who go to work, perform services and get taxed at 15 percent,” added Jones.

Jones said that managers who have “no skin in the game” should be taxed at 35 percent. It is correct, he said, to tax investors at 15 percent, because they have risked their own capital by investing.

Curran said the proposed tax hike was targeting a particular group of people on Wall Street who benefit from the 15 percent tax rate. He added that such a change in the tax code now, during the nascent economic recovery, could stifle growth.

“You are going to limit the access to capital at a time when entrepreneurs and industries that actually employ people and increase the tax base, generally, really need the access to that capital," said Curran. "Taking it away now is a very bad idea.”