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US House To Hold Tax Fairness Hearing

by Leroy Baker,, New York

31 August 2007

House Ways and Means Committee Chairman Charles B. Rangel (D-NY) has announced that the Committee will hold a hearing next month on fairness and equity in the US tax code.

The hearing will focus on a number of tax fairness issues, including the tax treatment of investment fund managers and the impact of the alternative minimum tax on working families. It will also examine the reasons why investment funds are being organized offshore.

Rangel revealed that the hearing will also analyse the claims by the Bush administration that the 2001 economic stimulus package “erases inequities in the tax code or eases inequities in the tax code”. The Ways and Means Chairman added that there are also other aspects of the US tax laws that are "worthy of examination", including provisions related to investment funds such as private equity funds and hedge funds. Concerns have been raised regarding the manner in which investment fund managers are able to structure their compensation. Others have observed that current tax rules force investment funds to form outside the United States.

In announcing the hearing, Chairman Rangel stated: “One of the fundamental duties of the Committee on Ways and Means is to conduct oversight of the tax code and ensure that our tax laws promote fairness and equity for America’s working families. This hearing will examine a number of tax provisions to determine whether they are functioning fairly and equitably.”

House Democrats have already introduced legislation that would ensure that investment fund managers who take a share of fund profits as compensation for investment management services, known as carried interest, would be taxed at the ordinary income tax rate. Currently, the managers of private investment partnerships are able to receive compensation for these services at the much lower 15% capital gains tax rate, rather than the ordinary income tax rate, by virtue of their fund’s partnership structure.

The legislation would ensure that any income received from a partnership, capital or otherwise, in compensation for services would be seen as ordinary income for tax purposes. The capital gains rate would continue to apply to the extent that the managers’ income represents a reasonable return on capital that they have actually invested in the partnership.

"Congress must ensure that our tax code is fair. We have to be sure that the lower capital gains tax rate is not being inappropriately substituted for the tax rate on wages and earnings," explained Rep. Sander Levin (D - Mich.), who introduced the bill along with Rangel, Rep. Barney Frank (D - Mass.) and ten other Democrat members of the Ways and Means Committee.

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