Congressman to Re-introduce Bill to Eliminate Carried Interest Tax Break

Rep. Sander Levin, D-Mich., the ranking Democrat on the tax-writing House Ways and Means Committee, said Wednesday he would re-introduce legislation later this year to end the tax break on carried interest income.

Levin said he has twice before authored legislation to end the tax break. Instead of taxing carried interest income at the 15 percent capital gains tax rate, the bill would subject carried interest to the same top tax rate of 35 percent as ordinary income. The tax break is typically claimed by private equity firm partners, as well as hedge fund managers and venture capital and real estate firm partners. It has attracted fresh controversy amid Republican Presidential candidate Mitt Romney’s admission that his effective tax rate is probably close to 15 percent (see Romney to Release Tax Return in April).

The financial industry has lobbied heavily to keep the 15 percent carried interest tax break in place. As the former head of the private equity firm Bain Capital, Romney continues to earn the bulk of his income from his investments despite leaving the firm in 1999.

Levin said he originally introduced his legislation in 2007 and it has passed the U.S. House four times as part of broader measures since then, but it has yet to pass the Senate.

“Gov. Romney’s statement that his tax rate is close to 15 percent likely reflects that he has benefited from a loophole that we have been trying to close for years,” Levin said in a statement. “In 2007 I introduced legislation to close that loophole and it has passed the House four times as part of broader measures. When Gov. Romney says his tax rate mostly reflects returns on his own investment, he needs to clarify how much this is truly money that he invested himself and how much is carried interest income that he earned managing other people’s money. Conflating the two is at the heart of this tax equity debate.”

In exchange for providing the service of managing their investors’ assets, fund managers often receive a portion—usually 20 percent—of the fund’s profits, or carried interest, Levin noted. His legislation would subject this income to ordinary income tax rates of up to 35 percent instead of the much lower capital gains rate of up to 15 percent.

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