US House Democrats challenge private equity pay

WASHINGTON, June 22 (Reuters) - Democrats in the U.S. House of Representatives introduced a bill on Friday that would more than double taxes on the pay of managers of private equity funds, hedge funds and other investment partnerships.

Throwing down a challenge to some of the nation's savviest and richest financiers, the bill would set a higher tax rate for "carried interest." That is the 20-percent cut of profits beyond targeted returns typically kept by senior managers of private equity firms and other firms on major transactions. The bill, introduced with the backing of two senior Democratic committee chairmen, ratcheted up a confrontation between Congress and the booming private equity sector, a driving force behind a global surge in corporate buyouts.

Under present law, carried interest is taxed at the 15-percent capital gains tax rate, not the income tax rate of up to to 35 percent. The low tax rate makes carried interest a key source of vast fortunes for private equity's top ranks. "Congress must ensure that our tax code is fair," said Michigan Democrat Sander Levin, one of the 14 lawmakers who introduced the bill. "We have to be sure that the lower capital gains tax rate is not being inappropriately substituted for the tax rate on wages and earnings," Levin said in a statement.

Joining Levin in introducing the bill were Ways and Means Committee Chairman Charles Rangel of New York, and Financial Services Committee Chairman Barney Frank of Massachusetts.

The Private Equity Council, a lobbying group for the industry, criticized the bill. "The net effect of this legislation would be to substantially undermine the private equity industry, which has strengthened and made more competitive hundreds of companies and returned more than $430 billion in profits to pension funds, endowments, foundations and other investors," it said.