Carried Interest Tax Increase Will Offset US Tax Break Extensions, Claim Democrats

by Mike Godfrey, Tax-News.com, Washington

11 December 2009

The US House of Representatives has approved another year's extension of various tax breaks, but is offsetting them with a highly contentious increase of tax on 'carried interest' and further punitive measures against offshore financial institutions.

If the Senate goes along, which is rather unlikely, tax on the hedge fund and private equity managers' remuneration commonly known as carried interest will increase from the capital gains rate of 15% to the usual rate on income at 35% (but soon to rise to 39.6%). This measure alone could bring in USD23bn of revenue over 10 years. Although this eliminates an anomaly in the tax system, opponents have described it as a disincentive to investment, coming just at a time when new start ups need to be financed to bring about growth.

Proponents of the Bill estimate that another measure in the Bill, which will require foreign banks to report the offshore account holdings of customers domiciled in America, will bring in a further USD8bn over 10 years. Failure to report such account holdings would lead to the imposition of a 30% withholding tax on the bank's accounts. However, amendments were made to these provisions to extend the lead-in time before the new rules take effect.

“This bill provides critical tax relief for hardworking families and businesses to help spur economic growth and create jobs,” said Ways and Means Committee Chairman Charles B. Rangel (D-NY). “Congress must act to give these families and businesses certainty that they can continue counting on this relief to plan their budgets for the coming year. I hope we can soon break away from this yearly dance of expiration and extension by tackling comprehensive tax reform to close loopholes and simplify the code."

The tax breaks, 49 in all and set to expire on December 31, included assisting retailers with accelerated tax depreciation on store refurbishments, extension of research tax credits for business and even numerous individual tax breaks such as deductions for college expenses.

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