All carried-interest distributions from private-equity funds and hedge funds would be taxed as ordinary income instead of capital gains thus more than doubling the tax rate of 15% under the budget President Barack Obama unveiled today, Treasury Department officials said.
The controversial provision, which has been discussed in Congress over the past several years and would start in 2011, would raise $2.7 billion in fiscal 2011 and $4.3 billion in fiscal 2013, one official said. Managers of hedge and private-equity funds traditionally have paid taxes at capital gains rates on carried interest, which is the share of a partnership's earnings dished out to managers as an incentive to maximize the performance of the investment fund.
The senior officials briefed reporters at the Department of the Treasury on the condition that they not be identified by name.
The proposal would apply to all partnerships, including real estate, oil and gas, and all other types of partnerships.
We made a decision that if you're applying something like this, it should apply across the board, and not picking some industries vs. others, an official said.
The Obama budget does not treat any particular industry different, another official said. If you have carried interest, it would be treated as ordinary income under our proposal.
While this official acknowledged that high taxes could deter entrepreneurial activity, he said that higher taxes put in place during the Clinton administration also coincided with economic growth and productivity gains.
Sara Hansard is a reporter at InvestmentNews, a sister publication of Pensions & Investments