On November 1, the House Ways and Means Committee approved a bill (H.R. 3996) that would close the tax loophole for “carried interest” earned by buyout-fund managers. Closing this unwarranted loophole will raise $25 billion over ten years, offsetting half the cost of providing AMT relief for 2007. The Carried Interest Provision Is a Subsidy for Fund Managers, Paid for by the Rest of Us. All taxpayers, whether middle-class or wealthy, are subsidizing the compensation of these fund managers, who can earn hundreds of millions of dollars a year. Warren Buffet, among others, has argued that it is totally unfair for these fund managers to pay taxes at a lower rate than middle-class taxpayers like the people who answer their phones and deliver their mail. Eliminating the Carried Interest Loophole Has No Effect on the Taxation of Capital Gains “Carried interest” is the share of profits that investors pay to their fund managers to compensate them for managing the investors’ money. But fund managers have been allowed to pretend that this compensation represents profits on money they have invested themselves,thus entitling them to pay taxes at the low capital gains rate of 15 percent rather than the regular rate of 35 percent that other highly compensated workers pay. (If fund managers actually invest their own money, the bill would still treat the returns as capital gains.) Eliminating this Tax Loophole Will Have No Effect on Realtors Some have argued that because real estate development deals sometimes incorporate carried interest, the entire real estate industry will suffer if this tax subsidy is eliminated. This is untrue. The legislation would affect people who are providing investment advice and who are paid for such services with a share of profits (if any) connected to real estate. But other people in the real estate industry, such as realtors, are already paying federal income taxes at the regular tax rates. In other words, realtors... just like other taxpayers, don’t benefit from the carried interest loophole. Instead, they are subsidizing those who do. Congress Should NOT Carve Out Exceptions that Would Keep the Loophole for Some Sectors Lobbyists from some sectors affected by this legislation have argued that their industries should be exempt from the proposed reform. For example, venture capital fund managers say they should be allowed to keep using the loophole because venture capital is a good thing. But as a matter of basic fairness, why should middle-income taxpayers subsidize the millions that are earned by venture capital fund managers or anyone else? If it is unfair for the managers of buyout funds to pay a lower tax rate than their secretaries, how could it be acceptable for managers of venture capital funds to pay a lower rate than their secretaries? In any event, closing the carried interest loophole won’t increase taxes on investments in venture capital. It will only affect those who are managing the the investments, by taxing their compensation at the same rates as other well-compensated workers. (for the rest of the report, visit: http://www.ctj.org/pdf/carriedinterestfacts.pdf )