Private Equity Tax Could Remedy AMT Pain

The House bill, passed by the Democratic majority in a vote down party lines, would also double the tax on carried interest income for investment firms from the capital gains rate of 15% to the ordinary income rate of 30%.

That would raise an estimated $25 billion over 10 years and pay for roughly half the gap created by the AMT fix, which would cost the Treasury an estimated $50 billion over 10 years. The rest of the gap would be covered by a variety of other, less contentious measures in the bill.

Covering the gap is critical because the new Democratic majority reinstated "pay as you go" rules for Congress. These rules were abandoned by the Republican-controlled Congress in the early years of the Bush adminstration, heralding a surge in deficit spending by the U.S. government that has left the Treasury awash in red ink.

"Coming up with an offset for the AMT is really important, and [taxing carried interest income as ordinary income as opposed to capital gains] is one of the easiest conceptual things that's available now to Congress," says Joseph Bankman, a tax law professor with Stanford University. "Congress never likes increasing anybody's tax bill, but if you have to do it for some people, this is about as clear-cut a case as you're ever going to find."

Hedge funds and private equity firms are largely unregulated investment vehicles that are exclusive to the most well-heeled clientele in the world. As a group, they raked in staggering profits during the recent era of easy credit on Wall Street that has left the U.S. housing market reeling from an outbreak of foreclosures in low-income markets while the broader economy flirts with recession.