Senate Weakens Bid toTax Wall Street Like Rest of Us

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McClatchy Newspapers

Senate Weakens Bid toTax Wall Street Like Rest of Us

by
Kevin G. Hall and David Lightman

A supporter of financial reform legislation demonstrates on Capitol Hill. (AP)

WASHINGTON - Senate Democrats Tuesday weakened efforts to end a
controversial Wall Street tax break, watering down a bid to raise taxes
on managers of hedge funds, private-equity funds, venture capital firms
and other business partnerships.

The Senate action retreated from a step taken last month by the House
of Representatives, where lawmakers voted to get tough with Wall Street
financiers, an apparent bow to election-year pressure from constituents
outraged that some captains of finance were taxed at lower rates than
their secretaries are.

Currently,
managers of these investment funds are compensated with a share of the
fund's profits, referred to as "carried interest." This compensation is
taxed as a capital gain, and the capital gains tax is now 15 percent.

Senators
scaled back the House plan to tax as "ordinary income" some 75 percent
of the fund-income these managers receive. Instead, the Senate would
trim the tax hit to 65 percent, and 55 percent for assets held longer
than seven years.

In real-world terms, the Senate change means
that fund managers most likely would fall into the top tax bracket for
65 percent of their compensation. The top bracket stands at 35 percent
now, but absent a change by Congress would revert to 39.6 percent next
year.

The Senate plan, part of an emergency spending and jobs
bill, is expected to raise about $14.45 billion over a decade, some $3
billion less than the House version would. In both bills, the money
would help pay for a series of economic aid programs, notably extended
unemployment benefits and summer jobs for at-risk youth.

Congress
wants to raise the tax to generate revenue to pay for new government
spending when the federal deficit is at a record high. Many of the
bill's provisions are considered emergencies, which is why most
Democrats and some Republicans are willing to add to the deficit. In
addition, extracting tax money from the wealthy is a popular way to
appeal to voters.

Sen. Olympia Snowe of Maine, a centrist
Republican, wants to see more deficit reduction and thought "some of
these (fund-manager) earnings should definitely be treated as ordinary
income."

Other senators said fairness is the issue.

"It's
certainly unfair that a hedge fund manager never has to pay the same
tax rate as a teacher or firefighter," said Sen. Claire McCaskill,
D-Mo. "But then again, we want to continue to encourage the creation of
capital investment."

The financial sector argued that's just what's at risk.

"The
proposals will stifle innovation and the free flow of capital," said
Scott Talbott, the chief lobbyist for the Financial Services
Roundtable, which represents big financial firms. Money that could be
reinvested would instead flow to government, their logic goes.

The
National Venture Capital Association, whose members help finance
start-up tech firms, welcomed the Senate retreat. Spokeswoman Emily
Mendell described the Senate language as "moving in the right
direction" because it made exceptions for longer-term investments.

While
the change is designed to hit Wall Street, real estate partnerships
would account for almost half the partnerships affected.

"According
to the IRS, these real estate partnerships hold over $1.5 trillion of
commercial real estate assets throughout America, including: rental
housing, office buildings, shopping centers, medical facilities,
hotels, senior housing and industrial properties," Jeffrey DeBoer, the
president of the trade association The Real Estate Roundtable, said in
a blog posting Tuesday. "The carried interest tax proposal would change
the taxation of all these partnerships - for past and future
investments."

From both the political left and right, some senators vowed to undo the compromise.

Asked
if they'll succeed, Senate Finance Committee Chairman Max Baucus,
D-Mont., who helped broker the deal, said, "My guess would be no."

But they'll try.

"If
someone is making $15 an hour, it's taxed 100 percent as ordinary
income," said Sen. Bernard Sanders, a Vermont independent, unhappy with
the compromise. "Instead, we continue to have a tax system that's
benefiting upper-income people."

Sen. Orrin Hatch, R-Utah, a senior Finance Committee member, opposes the Senate position for the opposite reason as Sanders.

"This is a mistake. It's a way of grabbing more taxes, and it could hurt a lot of companies," he said.

ON THE WEB

Summary of Senate legislation

House Democrats' supplemental spending plan

House roll call on extended benefits

Congressional Budget Office analysis of Senate emergency legislation

CBO deficit projections

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