The preferential tax rates that private-equity managers pay on some profits survived Congress's Jan. 1 budget deal. That victory may not last, according to Bloomberg. For private-equity managers, changes in the tax treatment of so-called carried interest may affect them more than tax increases now on the books. Congress faces a series of deadlines in the next few months over spending cuts, the debt ceiling and the annual budget. Democrats including President Barack Obama want to raise more revenue, and carried interest is an obvious candidate. The share of profits in buyout deals, known as carried interest, is often taxed as capital gains, which receive preferential rates under the tax code compared with levies on wages. In the budget deal, lawmakers increased the top rate on long-term capital gains to 20 percent from 15 percent and the maximum rate on ordinary income to 39.6 percent from 35 percent.
Heads of private-equity firms including David Rubenstein, who co-founded Carlyle Group, indicated in November that they expect carried interest to be among the tax breaks that the new Congress will scrutinize. "Carried-interest taxation and a great variety of other issues will no doubt be addressed," Rubenstein said Nov. 8. Billionaire George Roberts, who runs the private-equity firm KKR & Co. (KKR) with his cousin Henry Kravis, said on Nov. 14 that "it would be good to look at everything in the tax code" to make it simpler and fairer. Roberts has an estimated net worth of $4.4 billion, according to the Bloomberg Billionaires Index. Still, the tax treatment of carried interest may not be changed because the budget deal didn't include an overhaul of deductions or expenses in the tax code, said Libby Cantrill, who focuses on public policy issues for the asset management firm Pacific Investment Management Co. based in Newport Beach, California.
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