Rangel's Priority Is Repealing the AMT

WASHINGTON — Amid mounting opposition to a proposed tax hike on the managers of hedge funds and private equity firms, the chairman of the House Ways and Means Committee, Rep. Charles Rangel, is making clear that his first priority is fixing the widely reviled alternative minimum tax.

Congressional Democrats have zeroed in on private equity taxation in their search for new revenue sources to pay for expanded health care and other domestic spending priorities. Mr. Rangel convened a marathon hearing yesterday to delve into an array of tax "fairness" issues.

"It has not been the goal of this committee to target any tax provisions other than the AMT," the Harlem Democrat said at the outset of the hearing, which featured 20 witnesses. "However, it is fair to say that since the AMT is such an expensive revenue loser — because the revenue it brings in was never expected — that naturally we have to look at the entire tax code."

Created in 1969 to ensure that the wealthiest Americans assumed at least a minimum tax burden, the AMT, because it is not adjusted for inflation, increasingly is affecting middle-income taxpayers and has drawn criticism from both sides of the political aisle. More than 23 million Americans could be subject to it this year.

"It's the perfect storm of bad tax policy," the director of the Urban Institute's Tax Policy Center, Leonard Burman, told lawmakers yesterday, adding that the AMT is "hideously complex."

Yet the cost of repealing the AMT is estimated at more than $800 billion over the next decade, leading to the proposed tax hike on private equity. A bill sponsored by Mr. Rangel and Rep. Sander Levin of Michigan would more than double the tax rate that hedge fund and private equity managers would pay on their investment gains, known as "carried interest." Carried interest is currently subject to the capital gains rate of 15%, but the proposed change would treat it as income subject to the marginal rate of as much as 35%.

Citing annual incomes for managers as high as $500 million, one Democrat, Rep. Artur Davis of Alabama, made no secret of his view that the party should look for revenue from "individuals who are making massive amounts of money," saying they "frankly won't really miss the difference."

Economists and tax lawyers testifying yesterday debated the likely impact of the tax increase on the financial sector and the economy, as Republicans on the committee pressed them on whether it would drive investment overseas or whether managers would shift the burden to investors by charging higher rates.

A Republican congressman from Virginia, Eric Cantor, said Democrats were on a "hunt" for new revenues and that the private equity proposal "targets one of the most innovative sectors of the economy."

In a prepared opening statement, the ranking Republican on the committee, Rep. James McCrery of Louisiana, warned that the proposal "will move us backward while the rest of the world moves forward to improve their competitive position." He added: "I seriously doubt this proposal will become law during the 110th Congress."

The debate over the taxation of hedge funds and private equity has raged on Capitol Hill amid heightened scrutiny of the $2 trillion industry and of the vast profits the firms have taken in.

The effort to raise the tax rate on carried interest faces opposition from the private equity industry, and more recently from the U.S. Chamber of Commerce and a coalition of minority and women business groups.

As he did at a Senate committee hearing in July, Bruce Rosenblum, the chairman of the industry's lobbying group, the Private Equity Council, warned that a tax hike on carried interest could discourage investment and hurt American competitiveness.

The proposal has divided New York's two senators. Following her top Democratic rivals in the presidential campaign, Senator Clinton has come out in favor of the tax hike. Senator Schumer, the third-ranking Democrat in the Senate, has signaled his opposition, citing the potential harm to Wall Street and New York's competitiveness worldwide. He also has said targeting partnerships only in the financial sector would be unfair, suggesting that a similar increase be considered for partnerships in the oil and gas industries. Mayor Bloomberg, meanwhile, has mostly stayed silent on the issue.

The Senate Finance Committee held its third hearing on the issue of carried interest yesterday, focusing on pensions.