Clinton Faces Pressure on Hedge Funds

WASHINGTON — Senator Obama is joining John Edwards in calling for hedge funds and private equity firms that go public to pay higher taxes, increasing the pressure on Senator Clinton to take a stand on an industry facing mounting scrutiny in Congress.

A spokesman for Mr. Obama told The New York Sun late yesterday that the Illinois senator had asked to co-sponsor legislation that would treat all publicly traded partnerships — such as hedge funds and private equity firms — as corporations, forcing them to pay a 35% tax rate on income. Currently, those firms pay no corporate income tax; instead they are taxed on the income of their individual partners, often at the lower 15% capital gains rate.

This is the first definitive step Mr. Obama has taken toward supporting the bill.

Earlier in the day, Mr. Edwards, a former North Carolina senator, issued a statement backing the legislation along with a similar effort to force managers of hedge funds to pay more taxes on profits known as "carried interest."

The issue has emerged in the Democratic presidential nomination fight amid a flurry of activity yesterday in Washington. An assistant Treasury secretary, Eric Solomon, warned a Senate committee that raising taxes could hurt the economy and stifle entrepreneurship, while the Securities and Exchange Commission separately approved a new regulation aimed at preventing hedge fund advisers from misleading investors.

Congressional inquiries and legislative proposals have followed heightened attention on the expanding hedge fund and private equity industry, particularly in light of the recent public offering by Blackstone Group, a New York-based private equity firm. Amid news stories highlighting the wealth enjoyed by managers of these firms, some lawmakers and a former Treasury secretary in the Clinton administration, Robert Rubin, have suggested they should be paying billions more in federal taxes.

But while the issue resonates with many Democrats calling for corporations and high-earning American to pay higher rates, it has put politicians like Senators Clinton and Schumer in a bind. They represent New York City, which has benefited from the success of hedge funds and private equity firms, which play a significant role in the city's economy. They also benefit from campaign contributions and fundraising by those involved in the industry.

Both senators appear torn. Even as Mrs. Clinton's chief campaign rivals came out yesterday in support of higher taxes for hedge funds, a spokesman for her Senate office, Philippe Reines, said her position had not changed from three weeks ago. At that time, in regard to the bill on publicly traded partnerships, he said: "Senator Clinton believes there are broad concerns surrounding private equity in relation to the rest of the market that need to be examined and she is evaluating this and other proposals."

Mrs. Clinton attended a recent campaign event in New York with Warren Buffett at which the chairman of Berkshire Hathaway called for increasing taxes.

Mr. Schumer has made a vocal effort to maintain New York City's status as the world's financial capital, even issuing a report earlier this year with Mayor Bloomberg warning of threats to its competitiveness from London and other cities. He reflected on those concerns at the Senate Finance Committee hearing yesterday, saying that Wall Street should not be singled out among other industries. "I will not stand for treating financial-services partnerships one way, while all the other partnerships are treated another way," Mr. Schumer said, Reuters reported. "This isn't to say that we should make no changes to how carried interest or hedge funds are taxed, but we should treat everyone fairly and everyone equally," Mr. Schumer said. "If we are going to change how we tax financial partnerships, we should treat oil and gas and venture capital and real estate and everything else the same."

Given Mrs. Clinton's home-state ties to Wall Street, Messrs. Obama and Edwards may sense an opportunity to outflank her to the left on the issue and score points with the more left-leaning Democrats who vote heavily in the party's primary.

For Mr. Edwards, backing higher taxes for hedge funds also helps to neutralize a possible liability with the Democratic base: time he spent advising a prominent hedge fund, Fortress Investment Group, after he left the Senate in 2005. His critics have pointed to his wealth, along with the disclosure that he spent $400 on a haircut, as evidence that his lifestyle is out of synch with populist message he uses on the campaign trail.

He said the tax "loophole" for hedge managers illustrated his contention that America is a nation divided into rich and poor. "You want to know what I mean by two Americas? A tax code that lets hedge fund and private equity managers making hundreds of millions a year pay taxes at a lower rate than their secretaries is wrong," Mr. Edwards said.

A campaign aide yesterday said that he did not earn carried interest when he worked for Fortress.

"It's a good strategy," a professor of political science at Baruch College, Douglass Muzzio, said of Mr. Edwards. "He's running a populist campaign, and this is a classic populist message."

The Senate Finance Committee is expected later this month to hold a second hearing on carried interest, where industry representatives and hedge fund managers will testify. Hearings are also expected in the House.