Showdown on Fund Taxes

The Wall Street Journal reports:

A three-year battle over how the federal government taxes investment partnerships is coming to a head, after Senate Democrats unveiled a proposal that would more than double the taxes on private-equity, hedge-fund and certain real-estate managers.

The move is the strongest indication yet that financiers will pay higher taxes to help close an expanding U.S. budget gap. Congress is taking aim at the perceived excesses of the financial-services industry, but the proposed changes have implications well beyond Wall Street.

The proposed law would tax "carried-interest" income, or the share of profits that fund managers receive as part of their compensation. This income is currently taxed at a 15% rate, while the ordinary income by most wage earners is taxed at up to 35%. The new law would raise the tax rate for partnership income to an effective 30% in 2011 and 33% in 2013.

Some hedge fund managers might be retiring.