Will Higher Taxes on Carried Interest Affect Hedge Fund Jobs?

This week saw two pieces of legislation put forward that will have an impact on hedge funds. Both Senate and House financial reform bills will require the managers of hedge funds over a certain size to register with the Securities and Exchange Commission. This will allegedly give the agency a clearer view into the trading positions and investment strategies of these funds.

The other news was that Senate Finance Committee Chairman Max Baucus (D-Mont.) and House Ways and Means Committee Chairman Sander Levin (D-Mich.) introduced legislation to change the way that carried interest in hedge funds is taxed.

Carried interest is the portion of profits that fund managers keep for themselves, over and above the hurdle rates agreed upon with investors.

According to the Wall Street Journal, beginning in 2012, the new plan proposes to tax the first 75% of carried interest on all types of investment funds (private equity and venture capital, too) at the higher regular income tax rates. The remaining 25% would continue to be taxed at the lower capital gains rate. The new, higher rates would be phased in over the next two years.

It amounts to a tax increase in the neighborhood of 108% in 2011 and 2012, and as much as 156.7% higher in 2013, according to calculations by industry insiders.

But the measure may hurt private equity and venture capital firms more than hedge funds, says Gerry Langeler of OVP Venture Partners, a venture capital firm in Portland, Ore. In a guest article for Dealbook, he points out the irony of the new tax grab. Congress was initially aiming to take a swipe at hedge funds with the proposed legislation. But hedge funds typically do not hold assets long enough to qualify for capital gains treatment anyway. So those most affected by the proposed tax rates may instead by private equity and venture capital partnerships. The very people responsible for creating new jobs and business growth in America.

What’s your opinion? Do you think higher tax rates on carried interest for hedge funds will have much of an impact on their business? Add your comments below.

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{ 1 comment }

GORDON May 29, 2010 at 2:46 am

Although the reason given for the tax hike is job creation, economic recovery and revitalization of communities across the country, which is fair, but it is going to affect commercial real estate community badly. Some fund managers may move to overseas to get tax benefits.

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