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Democrats Set To Seek Wider Tax Increases

Democrats may dodge a tax hike on private equity managers and instead look to raise other taxes that would generate greater revenue from a broader swath of the American economy.

At hearings on Capitol Hill yesterday, Senate Democrats voiced fresh doubts about legislative proposals to increase tax rates in the burgeoning private equity industry, questioning both the fairness of the plans and whether they would yield the revenue infusion lawmakers are seeking for the federal coffers.

The skepticism signaled a lack of widespread support among Democrats for separate private equity taxation bills in the House and Senate, putting the bills in serious jeopardy.

Lawmakers indicated yesterday that they might turn their attention to more far-reaching tax shifts, such as increasing the rate on capital gains, to 20% from 15%, and the marginal income rate for the top-earning Americans, to 40% from 35%. Those proposals, however, may face even stiffer resistance from Republicans who advocate lower taxes.

Speaking at a Senate Finance Committee hearing, Senator Schumer reiterated his opposition to singling out the investment industry for a tax hike, saying it would unfairly hurt New York's economy. But he also stressed that his stance had nothing to do with an opposition to tax increases for wealthy Americans in general, only this particular tax increase.

"It's not about keeping taxes low for wealthy hedge fund owners or private equity partners," Mr. Schumer said. "In fact, I've been very clear about how I believe the country needs more revenues to pay for certain priorities, and that the wealthiest Americans who have seen their average tax rates decline in recent years should be the first to pay more."

The bottom line, he said, is that the private equity plans would not generate "nearly enough" cash to pay for new spending in education and health care, and to eliminate the "alternative minimum tax," a levy designed for the wealthy that increasingly has placed a greater burden on the middle class.

"Most of us don't enjoy raising taxes," Mr. Schumer said, "but if we have to raise taxes on the wealthiest Americans to pay for other priorities or AMT relief, we should strongly consider doing it for everyone, not just one industry."

Mr. Schumer, the third-ranking Democrat in the Senate, said the House bill that would raise taxes on investment gains of hedge fund managers, known as "carried interest," would generate $4 billion to $6 billion, just one-tenth of the estimated $52 billion it would cost to scrap the AMT for a single year. Led by Rep. Charles Rangel of Harlem, the House Ways and Means Committee is set to hold its own hearings on the carried interest proposal in September.

Other Democrats on the committee also voiced support for a broader tax change, including Senator Salazar of Colorado and Senator Wyden of Oregon.

The shift came as industry leaders testifying at the hearing spoke out against the private equity tax plans, which could more than double the tax rates for managers of hedge funds and private equity firms. Those proposals had been gaining momentum amid scrutiny of the vast profits earned by firms like the Blackstone Group, as well as its chief executive, Stephen Schwarzman.

A managing director at the Carlyle Group, Bruce Rosenblum, warned that higher tax rates for private equity firms could stifle a growing and beneficial industry while pushing investment overseas. But in addressing the finance committee, Mr. Rosenblum and other industry representatives appeared to find allies where they might have expected to face resistance.

Senator Kerry of Massachusetts, the 2004 Democratic presidential nominee, expressed concern about a possible "downstream impact" of raising taxes on investment, citing worries about a decline in the house and subprime mortgage industries. "I think you've got to think carefully, particularly with this market," he said.

Another prominent Democrat, Senator Dodd of Connecticut, also expressed trepidation about the legislation yesterday. "I am concerned about the potential adverse effects that these proposals would have on capital formation, on job creation, and on institutional investors like pension funds and college endowments," he said in a statement.

Mr. Dodd is chairman of the banking committee and a candidate for the party's presidential nomination in 2008. Three of his chief rivals Â-- Senator Clinton, Senator Obama, and John Edwards Â-- have all come out in favor of higher taxes on carried interest.

Despite the doubts expressed yesterday, at least one Republican on the finance committee, Senator Ensign of Nevada, was not convinced that Democrats would simply let the proposal die. He predicted that they would try to tie it to a repeal of the alternative minimum tax next year, striking a compromise that would raise the rates on carried interest from their current 15%, but not as high as the 35% in the current House bill.

The committee's Democratic chairman, Senator Baucus of Montana, and its ranking Republican, Senator Grassley of Iowa, are sponsoring a bill that raises tax rates on private equity partnerships that go public, such as Blackstone. But they have not endorsed the House proposal that makes a similar change to the taxes on carried interest for hedge fund and private equity managers.

Mr. Grassley said after yesterday's hearing that he was no closer to a decision on carried interest, although he disagreed with criticisms that the tax proposals unfairly targeted Wall Street. "It reinforces what I thought at the very beginning, that it's going to take a lot of thought and consideration until I make up my mind," he told reporters.