The House Ways and Means Committee held hearings on proposals to raise taxes on managers of private equity firms and hedge funds, and to combat the expanding impact of the alternative minimum tax, as well as listening to testimony about the impact of the Bush tax cuts.

The subject of the hearings, led by Chairman Charles Rangel, R-N.Y., was a "fair and equitable tax policy for America's working families." Rangel said the original focus had been the AMT, but that the question of taxation of carried interest had been an outgrowth of that effort. The carried interest classification allows the managers of hedge funds and private equity firms to be taxed at a 15 percent rate, whereas critics believe they should be taxed on their earnings as ordinary income at rates as high as 35 percent. Any attempt to lessen the impact of the AMT on taxxpayers would involve raising revenue from other sources.

"We have been driven by the AMT, but there has also been a lot of interest in the press lately about how hedge funds and partners in private equity firms are taxed," said Rangel in his opening statement.

The most controversial proposal seemed to be raising the carried interest tax. "Changes in the investment world have transformed this tax issue from a byzantine academic issue into a pressing matter of social policy," said Victor Fleischer, an associate professor with the University of Illinois College of Law, in his written testimony.

Bruce Rosenblum, managing director of the Carlyle Group and chairman of the Private Equity Council, weighed in, making points similar to those he made at a recent hearing before the Senate Finance Committee (see Private Equity Fights Tax Hike). "Despite the impression you might have, not all profits realized by a private equity sponsor from a fund are taxed at long-term capital gains rates," he noted.

The hearings stirred up heat, but the outcome of the battle is still in question. "I think there's a lot of momentum for raising the tax because it can be cast in terms of fairness, and it just looks like the fat cats are getting away with stealing out of the pockets of the little guy," said Bill Smith, director of the national tax office at Cbiz Accounting Tax and Advisory Services, in an interview with WebCPA. "But I think they're going to have a difficult time in singling out one type of industry for taxation."

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