Influential US politician Charles Rangel has introduced legislation that would characterise carried interest income as ordinary income rather than capital gains, effectively raising the tax rate from 15 percent to as high as 39.6 percent.
Rangel, chairman of the US House Ways and Means Committee, has introduced the Tax Extenders Act of 2009 which would prevent investment fund managers from paying taxes at capital gains rates on investment management services income that was received as carried interest.
The proposal includes an exception for managers’ contributions to a fund that don't include a loan made to a partner, directly or indirectly, by another partner or by the partnership. But capital contributions made under management fee waiver programmes, or “management profits interests”, would be caught up in the carried interest net.
The bill would require such managers to treat carried interest as ordinary income received in exchange for the performance of services, to the extent that carried interest does not reflect a reasonable return on invested capital.
The Tax Extenders Act of 2009, as introduced into the US House
“The bill would require such managers to treat carried interest as ordinary income received in exchange for the performance of services, to the extent that carried interest does not reflect a reasonable return on invested capital,” the draft legislation states. “The bill would continue to tax carried interest at capital gains tax rates to the extent that carried interest reflects a reasonable return on invested capital.”
Any gains or losses on the disposition of an investment services partnership interest would be taxed as ordinary income as well.
The House has passed similar legislation twice before: first as part of the 2007 bill, HR 3996, where it passed by a vote of 216 to 193, and second as part of HR 6275, introduced in 2008, where it passed by a vote of 233 to 189. In both instances the respective bills failed to get past the Senate.
The latest bill is consistent with a proposal in President Barack Obama’s fiscal year 2010 budget. In the budget, such a change is estimated to raise $24.6 billion over 10 years. The budget also contains a suggestion to raise the tax rate for the top bracket of ordinary income from 35 percent to 39.6 percent.