(Update with comments from hedge fund managers)
By Jessica Holzer
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- Democrats criticized the tax treatment of hedge fund earnings at a U.S. House of Representatives hearing on how the lightly-regulated investment pools may have contributed to the financial crisis.
Hedge fund managers testifying at the hearing differed on whether the tax on managers' so-called "carried interest" should be hiked, with billionaire financier George Soros and others expressing support for the idea.
If the tax on carried interest was "raised to higher levels, that would be okay with me," Renaissance Technologies President James Simons said.
House Oversight and Government Reform Committee Chairman Henry Waxman, D-Calif., said hedge funds receive tax breaks that allow a portion of their income to be taxed at lower rates than "many school teachers, firefighters or plumbers pay."
Rep. Elijah Cummings, D-Md., said, "I hope we can correct this injustice once and for all next year."
Waxman, whose panel does not have jurisdiction over tax matters, invited five hedge fund managers who earned an average of $1 billion last year. The issue of hedge fund and private equity managers' taxation cropped up last year, with the House twice approving legislation to raise taxes on carried interest.
The proposal stalled, partly because they would have affected a broad array of partnerships that also pay managers carried interest.
Cummings asked Joseph Bankman, a Stanford University law professor testifying before the panel, if the tax treatment seemed fair to him.
"No, I don't believe that that's either fair or efficient," he said. "A fundamental goal of tax policy is to try to tax everyone at the same rate, otherwise it interferes with the flow of labor."
Paulson & Co. President John Alfred Paulson said he disagreed with the current tax treatment. Citadel Investment Group President Kenneth C. Griffin said that the bulk of his earnings are taxed at ordinary income rates as high as 35% because they are based on short-term gains.
However, he defended the current tax treatment of carried interest, saying that hedge fund managers should be taxed the same way as restaurant owners.
"What we should seek to have is consistency in how we treat long-term capital gains," he said.
For private equity managers who often make longer-term investments, the 15% long-term capital gains rate generally applies on their carried interest. However, hedge fund managers are more likely to hold investments for less than one year. Ordinary income rates as high as 35% apply to such investments.
-Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com
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(END) Dow Jones Newswires
November 13, 2008 14:23 ET (19:23 GMT)

Publié le 13 novembre 2008 Copyright © 2008 Dowjones