June 23, 2007 (LPAC)--Fourteen senior Democratic House members, including two key committee chairmen, submitted legislation on June 22 which would tax managing partners of private-equity funds--many of whom have been earning hundreds of millions as fees--"just as any other American worker,'' rather than the tax privilege they now enjoy. This legislation is much stronger than the Senate Grassley-Baucus bill which applied only to private equity firms issuing public stock--i.e., to Blackstone Partners--with its effect delayed by five years. The House bill applies to any private equity fund; and, in fact, would apply to real estate investment funds (REITs) as well.

The sponsors include Ways and Means Committee Chairman Charles Rangel (a release is posted to the Ways and Means Committee website), Financial Services Committee Chairman Barney Frank, and Reps. Sander Levin, Pete Stark, Jim McDermott, John Lewis, Richard Neal, Earl Pomeroy, Stephanie Tubbs-Jones, John Larson, Earl Blumenauer, Ron Kind, and Bill Pascrell.

Private equity fund managers have realized often-huge annual income by taking both 2% of the total capital invested by all the partners in their fund, and 20% of the fund's profits, as their fees. But they have been paying only the capital gains tax rate, 15%, on this income--if not using other methods to avoid taxation altogether--rather than the income tax rate which would be, in most cases, 35%. The House bill would end this tax avoidance, and could take effect immediately on passage. It's estimated to raise annual Federal tax revenues by $10 billion, but also immediately poses a challenge to the power of these private-equity funds, which are borrowing huge amounts of "leverage'' and taking over and reselling even the largest corporations.