Congress is getting closer to agreeing on how to pay for extending many soon-to-expire or already expired tax breaks, but the answer is not likely to please either hedge fund managers, venture capitalists or multinational corporations.
Thats because the extensions for tax breaks such as the research and development credit, deduction of state and local sales taxes, and the additional standard deduction for real property taxes are likely to be paid for in part by raising the tax on carried interest. Right now, hedge fund managers, partners in private equity and venture capital firms, and many real estate investment trust partners pay capital gains taxes of just 15 percent.
Some Democrats in Congress argue that they should be paying the top income tax rate on ordinary income, which is currently 35 percent, and will rise to 39.6 percent next year. Advocates for VC firms and hedge funds have been lobbying furiously to prevent a hike in carried interest rates, but that increasingly appears to be a losing battle.
The tax extender legislation could come up for a vote this week in both the House and Senate, according to the Associated Press. The bill will also include provisions to extend unemployment benefits for up to 99 weeks and subsidize COBRA health premiums for the unemployed through the end of the year.
Multinational corporations that have been using foreign tax credits at their subsidiaries abroad to reduce their tax burden could also end up paying for the legislation. They have been fighting efforts to crack down on transfer pricing and tax deferral strategies for years, but as Congress searches for extra revenue to help make up for part of the ballooning budget deficit, the need to plug the various tax loopholes has taken on extra urgency.