A pair of Democrats in the Senate and House have introduced legislation to end the tax break for carried interest that benefits hedge fund managers, private equity firm partners and venture capitalists.

[IMGCAP(1)]Senator Tammy Baldwin, D-Wis., and House Ways and Means Committee ranking member Sander Levin, D-Mich., introduced the Carried Interest Fairness Act of 2015, H.R. 2889, on Thursday. The legislation would end the carried interest tax break and ensure that income earned managing other people's money is taxed at the same ordinary income tax rates as those of the vast majority of Americans instead of at capital gains tax rates.

“Instead of simply rewarding the wealthy with tax preferences, Washington needs to do more to respect hard work, invest in economic growth, and give the middle class a fair shot at getting ahead,” Baldwin said in a statement. “At a time when too many Wall Street millionaires pay a lower effective tax rate than some truck drivers, teachers and nurses, we need to eliminate this loophole and make sure those at the top are paying their fair share.”

The carried interest tax break enables investment fund managers to take advantage of the preferential 20-percent tax long-term capital gains rate on income received as compensation, rather than the ordinary income tax rates of up to 39.6-percent that most other Americans pay. This legislation would clarify that this income is subject to ordinary income tax rates rather than the much lower long-term capital gains rate. 

[IMGCAP(2)]“At a time when income and wealth inequality in this country continues to grow at a staggering rate, we should not be allowing individuals to be taxed at a lower rate on managing other people’s money than ordinary hardworking Americans,” said Levin. “There’s no reason that these fund managers shouldn’t be paying their fair share of taxes on their income just like everyone else.”

The House has passed legislation to address the carried interest tax break on four previous occasions, the most recent being in 2010 as an amendment to the Senate-passed Unemployment Compensation Extension Act of 2010. However, the legislation has made little headway since Republicans won control of first the House and last year the Senate, despite President Obama repeatedly calling for ending the carried interest "loophole." House Ways and Means Committee chairman Paul Ryan, R-Wis., ruled out any changes for the next two years when he was asked about ending the carried interest tax break at the American Institute of CPAs' Spring Meeting of Council last month in Washington (see Carried Interest Tax Change off Table until 2017, Ryan Says).

The Private Equity Growth Capital Council, a lobbying group for the private equity industry, released a statement objecting to the legislation. “This legislation discriminates against investment services partnerships by singling them out as the only partnerships that would not receive capital gains on the enterprise value of their organization," said PEGCC president and CEO Steve Judge. "All long-term capital gains should be treated the same. Private equity is responsible for pumping over $500 billion into the U.S. economy last year alone and strengthening thousands of companies across all 50 states and all 435 congressional districts. Raising taxes on carried interest would undermine the entrepreneurial risk taking required to start, save and grow businesses in all sectors of the economy."

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