Private Equity Tax Could Remedy AMT Pain

Nearly everyone agrees that Congress needs to quickly pass legislation to stop an unintended quirk in an old law from raising middle-class tax bills -- especially now that American households are struggling to contend with a slowing economy and a nasty downturn in the housing market.

One might also assume that as the public gets increasingly disgusted by the runaway spending bills and debt accumulated by Congress, lawmakers would feel obligated to abide by their recent pledge to offset any further spending increases or tax cuts with matching tax increases or spending cuts.

The way things are shaping up now on Capitol Hill, lawmakers who want to achieve both will have to vote for a measure that requires investment partnerships -- such as private-equity firms and hedge funds -- to pay the same tax rates on management fees collected from their clients that everyone else pays on their ordinary income.

Currently, these elite investment managers pay the lower capital gains tax rate on so-called carried interest income. These earnings, which can represent a large chunk of profits, typically come from firms pocketing a fifth of the returns they generate with their clients' capital.

Last week, the House of Representatives passed a $76 billion bill that includes a one-year fix to prevent the alternative minimum tax from hitting an estimated 23 million households with incomes as low as $50,000. The AMT was originally created to make sure millionaires paid income taxes, but its levels haven't been adjusted for inflation.