Private-equity and hedge fund managers should pay higher taxes on their fees, according to some financial advisers.
Private-equity and hedge fund managers should pay higher taxes on their fees, according to some financial advisers.
“The hedge funds have had an unfair playing field since the beginning,” said Paul Baumbach, a managing member at Mallard Advisors LLC in Newark, Del.
“This is a very good time to be looking at it and saying what’s fair,” added Mr. Baumbach, a chartered financial analyst and chartered financial consultant.
“I think that private-equity managers should be taxed the same as I am,” Bob Rockwell, an investment adviser representative in the Sandy, Ore., branch office of Cambridge Investment Research Advisors Inc. of Fairfield, Iowa, wrote in an e-mail. “After all, they are receiving advisory fees, aren’t they?”
Mr. Rockwell also is a certified financial planner.
Financial advisers pay ordinary income tax on the fees they earn. Fees earned by private-equity and hedge fund managers, meanwhile, generally are taxed at the lower capital gains rate.
“The rationale hedge funds are using that they should be treated differently — I don’t think it makes sense,” said Daniel Wishnatsky, founder of Special Kids Financial LLC of Phoenix.
House Ways and Means Committee Chairman Charles Rangel,
D-N.Y., is talking about linking higher taxes on private-equity and hedge fund managers with reforming the unpopular alternative minimum tax. Advisers have been increasingly concerned in recent years about the ever-encroaching AMT, which could affect some 23 million taxpayers if congressional action is not taken.
Legislation on table
House Financial Services Committee Chairman Barney Frank,
D-Mass., along with Mr. Rangel and 11 other Ways and Means Committee Democrats, introduced legislation in June that would change tax treatment of “carried interest.”
The legislation would tax “carried interest,” which accounts for the majority of compensation received by private-equity fund managers, at ordinary income rates of as much as 37.9%, compared with its current treatment at the capital-gains rate of 15%.
“There is a strong link between the two ideas” — reforming the AMT and raising taxes on private-equity and hedge fund managers, said Matthew Beck, spokesman for the Ways and Means Committee. “The chairman has recently been saying over the last couple of weeks that he believes there’s merit in linking the two.”
Falling short
However, raising taxes on private equity and hedge funds may not generate enough income to pay for substantial reform of the AMT.
A study released last month by University of Pennsylvania Law School professor Michael Knoll estimates that between $2.4 billion and $4.2 billion a year in addition-
al taxes would be collected if carried interest is taxed as ordinary income.
That falls short of making up for the estimated $52 billion in revenue that would be lost if the AMT went uncollected for one year.
In addition, according to the study by Mr. Knoll, private-equity funds could shift their tax obligations so that additional taxes on them would be offset by lower taxes on the companies they manage.
Some advisers do not believe AMT reform should be linked to
carried-interest taxes. However, even those advisers question whether private-equity fund managers should receive capital gains treatment.
“I don’t think there’s necessarily
a linkage between the two issues,” said Alexander Feick, managing director of investment advisory firm Paragon Capital Management in Denver.
The Financial Planning Association, also of Denver, has not taken a position on how private-equity and hedge fund managers are taxed, said Duane Thompson, managing director of the FPA’s Washington office.
However, “we’re 110% behind AMT reform,” he added.
The National Association of Personal Financial Advisors of Arlington Heights, Ill., also has not taken a position on how private-equity and hedge fund managers are taxed or on whether the issue should be linked with AMT reform, said chief executive Ellen Turf.
The hedge fund and private-equity industries oppose linkage of the two.
“Everybody’s in favor of AMT reform and Mother Teresa,” commented Jack Gaine, president of the Managed Funds Association in Washington. “They have to fund AMT, but there’s no necessary link between the two.”
