Hedge Funds, Real Estate Funds Fight Tax Plan - TheStreet

Hedge Funds, Real Estate Funds Fight Tax Plan

Hedge funds, real estate funds and other investors are girding for a battle on a plan to raise taxes.
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BOSTON (TheStreet) -- The Senate may begin debate on the House-approved American Jobs and Closing Tax Loopholes Act as early as this week. Although the bill has been promoted as fostering job creation, a tax increase aimed at hedge funds, private equity firms, venture capitalists and real estate partnerships could do just the opposite, their advocates say.

H.R. 4213, which passed by a vote of 215 to 204 in the House in May, includes a "carried interest tax." Currently, carried interest income is taxed at the regular capital gains rate of 15%. (By comparison, ordinary income is typically assessed at 35%.) The bill under consideration could boost the tax rate on carried interest income to 30% in 2011 and 33% in 2012.

Although the Senate is considering a lesser tax hit, those in the financial services and real estate industries are girding for battle.

"This punitive, 157% tax hike on growth investment by real estate, venture, private equity and other firms will hurt those companies that are most desperately in need of capital to sustain or create jobs and drive growth," says Douglas Lowenstein, president of the

Private Equity Council


Yesterday, the council released a report claiming that raising "carried interest" taxes could cut private equity investment by $7 billion to $27 billion a year and lead to thousands of lost jobs. The study concludes that the rate increase could reduce the overall value of the nation's commercial real estate assets and, in turn, contribute to an increase in commercial mortgage default rates.

The council analyzed reported equity invested in U.S. businesses by all types of private equity partnerships -- venture capital, buyout and growth capital -- between 1980 and 2009. During the past 30 years, annual invested equity rose from $723 million in 1980 to $49 billion in 2009. The record year for investing was 2000, when $137 billion was invested in more than 7,000 businesses.

Sizeable changes to the effective tax rate on private equity investments have been enacted on three occasions in the past 30 years: 1986, 1997 and 2003. In each case, an increase in the effective tax rate reduced the growth of private equity investments and a cut in the tax-rate-stimulated investment.

Based on one of its calculations, the council says each 1 percentage point increase in the effective tax rate on private equity could trigger as much as a $1.8 billion decline in investment. The House's proposed 14.7 percentage point increase in the tax rate -- from 23.8% (in 2013) to 38.5% -- could result in an annual decline of $27 billion in private equity investments, the council says.

Even when using 2009 as a benchmark, a year when private equity investments were low, the tax could result in an annual investment reduction of $7.7 billion, according to the council's analysis methods.

Applying the same methodology used by the Obama administration to forecast the effect of the stimulus-spending package on the economy, the council's study estimates that employment could be 37,000 to 128,000 lower than it would be if carried interest tax rates were to remain unchanged.

-- Reported by Joe Mont in Boston.


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