Barack Obama Capital Gains Tax

President Obama May Increase Capital Gains Tax

The election of Barack Obama for President of the United States could spell bad news for the private equity industry as he will likely support increasing taxes on carried interest earned by private equity fund managers.

When President-elect Barack Obama steps into office on Tuesday, January 20th of next year, he will inherit among other responsibilities a massive deficit that he would likely seek to reduce. One of his proposals for increasing revenue to curb the deficit is the closing of tax loopholes that benefit big businesses and upper class Americans. Throughout the primary and general election Obama harped on this idea and suggested he would support altering the current tax code for capital gains.

A large part of private equity earnings come from carried interest, in which a fund's manager claims a percentage of the total profits earned of the fund when an investment is sold. While management fees are taxed as high as 35%, the carried interest is regarded as capital gains in the U.S. tax code. Instead of the average capital gains tax of 15% private equity fund managers could see their carried interest taxed up to 35%. The opposition to the current tax treatment argues that managing a fund is a service and should be taxed in the same way as other service providers like say teachers or mechanics.

The Bush administion will be replaced by an Obama administration that favors increasing taxes on carried interest earned by private equity managers. Under the Bush administration, any legislation that would change the capital gains tax stood little chance of passing. Even with the House majority being Democrats, who would likely support increasing the tax, the threat of President Bush vetoing the bill ensured that private equity managers would enjoy the same tax treatment. However, with a struggling economy, Democratic majority in the House of Representatives and the new Democratic President entering office shortly, the likeliness of increasing taxes on carried interest is far greater.

The opposition for such a change comes from the possibility that it would effect much more than private equity groups by boosting taxes on venture capital and real estate partnerships. As David Hirschmann, the CEO and President of the Center for Capital Markets Competitiveness explains: "This was viewed initially as a way to tax a few large private equity firms, without realizing that the basic tax structure is used by 2.8 million partnerships that are literally the small office building on the corner of Main Street." (CNN) While proponents of increasing the taxes on carried interest originally projected revenues from the taxes to be $25.6 billion, that estimate seems to have fallen since last year. With investor interest in private equity slipping and fewer deals being executed, the amount of revenue would likely be far below that.

Tags: Barack Obama Private Equity, Barack Obama Carried Interest, President Obama and Private Equity, Private Equity tax, Carried interest Obama, Obama capital gains tax

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