Congress Considers Private-Equity Firms' Taxes

Private-equity firms enjoy a very low tax rate on most of their profits.

That situation has drawn the attention of the tax-writing committees on Capitol Hill. Both the House and the Senate are considering legislation that would change the way private-equity firms are taxed.

The chairman of the Senate Finance Committee, Max Baucus, a Democrat from Montana, opened a hearing on the matter Wednesday with a quote from former President Theodore Roosevelt: "The man of great wealth owes a peculiar obligation to the state because he derives special advantages from the existence of government."

A proposed Senate bill would more than double the tax rate on private-equity firms that go public from the current 15 percent to 35 percent. And a recently introduced House bill would apply to all private-equity and hedge funds.

That prompted magazine publisher Steve Forbes recently said these proposals might be driven by envy over the sky high salaries of some of the executives.

That drew a sharp response from the ranking Republican on the committee, Sen. Charles Grassley of Iowa.

"I'd direct Mr. Forbes and other critics to cool it. This is a bipartisan finance committee process that has not yet reached conclusions and hence that is what this hearing is all about," said Grassley, a co-sponsor of the Senate legislation.

Indeed, the boom in private-equity firms and hedge funds, as well as the explosion of personal wealth for their investors and managers, has made them the center of attention.

Private-equity firms acquire companies with large sums of borrowed money in hopes of quickly reselling the acquired firms at a profit. Hedge funds are loosely regulated investment funds for institutions and the wealthy.

The Bush administration used the hearing to warn that going after private-equity firms could hurt entrepreneurship and the economy.

The Democrats, who took charge of Capitol Hill in January, have promised to offset new tax cuts or spending increases with new revenue and a more equitable tax code.