The text of the Rangel bill proposing major changes in individual and corporate tax provisions is now available. Download rangel_tax_reform_act_oct_2007.pdf
The Joint Committee on Taxation (JCT) has estimated that the carried interest revenue raiser--requiring hedge and private equity fund managers to pay ordinary income rates on their share of fund profits rather than capital gains rates--would raise $25.7 billion over 10 years. Lobbyists for private equity are trying to counter the fairness arguments by asserting that it is unfair to give capital gains rates only to those who have invested capital in these private investment deals, rather than to those whose "sweat equity" makes the investments pay off.
Their argument, of course, cuts another way. If it isn't fair for investors to pay taxes at the preferential rate when managers of the funds have to pay taxes at the ordinary rate applicable to compensation, then how can it be fair to let any capital investor get the capital gains rate while the workers in the enterprise, who make it work, must pay the nonpreferential ordinary income rates on their salaries.
Of course, the lobbyists think that Congress will never undo the preference for capital gains. It tried back in the 1986 reform, and the influential owners of capital were able to make the provision disappear in almost no time at all. So probably they think their use of this argument will just call up all the resistance to correcting the preference for capital gains, and the investment fund managers can be allowed to continue with their cushy deal.
But the argument of "let us have our compensation at the capital gains rate, in spite of the fact that other types of workers have to pay ordinary income rates, because we have been getting that preferential treatment under the old rules" is clearly not a fairness argument, no matter how lobbyists try to clothe it as such.
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