WASHINGTON — Proponents say it's a matter of basic fairness, of giving well-heeled investment managers the same income tax treatment their secretaries face.
Those on the other side say the move runs counter to economic recovery efforts and could spur a meltdown in the commercial real estate market.
At issue is “carried interest,” the share of profits paid to executives at venture capital funds and real-estate partnerships, currently taxed at the capital gains rate of 15 percent.
Democrats are looking to tax most of that money at the significantly higher rate of regular income.
Curt Hofer, CEO of Omaha real-estate partnership Jasper Stone Partners, said increasing the tax rate on carried interest would cause them to increase their fees to investors, who would then have less incentive to purchase toxic assets in the commercial real estate market. Banks are holding $1.2 trillion to $1.4 trillion in such assets that they will need to unload.
“We are the primary solution for keeping this bubble intact that everybody talks and writes about with regard to commercial real estate being the next shoe to drop,” Hofer said.
The situation could result in government bailouts even larger than those after the subprime mortgage meltdown, he said.
Democrats want to use the tax increase on carried interest to pay for parts of a bill that includes billions in aid to states, an extension of unemployment benefits and other provisions. The Senate version, which would add about $79 billion to the federal deficit, failed a key test vote Wednesday.
Sen. Tom Harkin, D-Iowa, was the only Midlands senator to support it.
Sen. Chuck Grassley, R-Iowa, said the specific tax increase on carried interest would have “a tremendous detrimental impact” on commercial real estate.
Sen. Ben Nelson, D-Neb., has pushed for more of the legislation to be “paid for” but called the carried interest proposal a bad idea.
“I think it will impede development at a time that we're trying to encourage development and the creation of jobs,” Nelson said.
Sen. Mike Johanns, R-Neb., also opposes it:
“Increasing taxes on carried interest will stunt economic growth and investment in small businesses, inhibiting job creation in the midst of high unemployment.”
Nicole Tichon of U.S. PIRG, a federation of state public interest groups said there's no justification for treating the profits that go to fund managers differently from the salaries of regular people.
She rejected the suggestion that the change would result in higher fees to investors, saying that managers did not lower their fees when capital gains tax rates were lowered in the past.
Contact the writer:
202-662-7270, joe.morton@owh.com
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