Proposed legislation that would boost taxes paid by wealthy private equity managers could have the unintended consequences of hurting small business partnerships as well, President George W. Bush said on Thursday.
But Bush left much open to interpretation in his response at a news conference on whether it was fair for some of Wall Street's richest and smartest financiers to pay the low capital gains tax rate on much of their earnings.
What ends up happening is that in trying to deal with one particular aspect of partnerships is that you end up affecting all partnerships, Bush said, adding that some small businesses have been organized as limited partnerships.
So we're very, very hesitant about trying to target one aspect of limited partnerships for fear of the spillover it'll have in affecting small business growth. So we don't support that, Bush said.
Congress is considering bills that would raise taxes on the senior executives of private equity firms that buy out poorly performing corporations, overhaul them, and then resell them.
These executives typically take a 2 percent fee on such transactions and keep 20 percent of the profits from major transactions, in an arrangement known as carried interest.
One of a handful of bills in Congress would require managers of private equity firms and hedge funds to pay the higher income tax rate on carried interest gains.
Another approach would raise taxes on managers of private equity and other investment firms that go public as publicly traded partnerships (PTPs), as Blackstone Group (BX.N: Quote, Profile, Research) did.
In either approach, the tax rate on PTPs or on carried interest would increase to as much as 35 percent, the top ordinary income tax rate paid by most Americans, from the current capital gains tax rate of 15 percent.
The private equity industry argues that carried interest is now appropriately taxed at the capital gains rate. Critics say private equity and hedge fund managers are unfairly exploiting a tax loophole that should be closed.
Treasury Secretary Henry Paulson said last month he opposed a move by lawmakers to raise taxes on private equity managers, saying the present relatively low rate has promoted risk taking and benefited the overall economy.
Congress is expected to take up the issue again when it returns from its summer recess in September. Senate Banking Committee Chairman Christopher Dodd said last week he wants to hold a hearing on the legislation that has been proposed.