House to Vote on Alternative Minimum Tax

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Lawmakers plan to vote on a tax bill that prevents people from being hit with the alternative minimum tax. It targeted millionaires in the '60s, but due to inflation can now reach middle-income Americans. Democrats propose higher taxes on private-equity partners and hedge fund managers.

The U.S. House plans to vote on a tax bill today that would keep lots of Americans from being hit this year with the alternative minimum tax - as many as 23 million. It's a tax that targeted millionaires in the 1960s, but because of inflation it can now reach middle-income Americans.

Without those revenues, however, there'd be a $50 billion hole in the federal budget. So Democrats are proposing higher taxes on private equity partners and hedge fund managers.

NPR's Debbie Elliott reports.

DEBBIE ELLIOTT: The idea for the tax hike was circulating on Capitol Hill last spring in the form of an academic paper by Victor Fleischer, now an associate professor at the University of Illinois College of Law. He examined what's known in the private equity business as 2 and 20.

Professor VICTOR FLEISCHER (University of Illinois): 2 and 20 is the lingo for the compensation structure that determines the pay of the fund manager.

ELLIOTT: Managers get a fee equal to two percent of the capital they manage and then 20 percent of profits, which is called carried interest. It's the carried interest that has the attention of Congress. That's because it's taxed at the 15 percent capital gains tax rate, as opposed to the income tax rate, which can be 35 percent for top earners.

Professor Fleischer says that runs contrary to a tax structure intended to put a higher burden on those most able to pay.

Prof. FLEISCHER: These fund managers are some of the wealthiest workers in the country, right? They expend their labor in exchange for compensation just like a banker, a lawyer, a doctor, a school teacher. But unlike all of those folks, they are getting paid with this carried interest and paying tax at a lower capital gains rate instead of the usual ordinary income rate. So that's the issue that strikes me as unfair and has made this into a public policy issue this year.

ELLIOTT: The bill would treat carried interest as income. Hedge funds, equity funds, and real estate partnerships have lobbied hard against it; so has the National Taxpayers Union. Spokesman Peter Sepp says the group has long called for the elimination of the alternative minimum tax but doesn't think this is the way to do it.

Mr. PETER SEPP (National Taxpayers Union): It seems a ridiculous notion that revenue Congress was never entitled to get in the first place now has to be offset with tax increases elsewhere.

ELLIOTT: Sepp says it's politically easy to target fund managers.

Mr. SEPP: There's a bit of perception among tax policy makers that these folks are somehow very speculative, they're dangerous to the overall financial industry. So because they're such risk takers and they reap such large rewards, they feel that they ought to pay more taxes. That's not necessarily a legitimate argument in a capitalist system that's supposed to reward risk taking.

ELLIOTT: Some conservative Democrats agree and say they'll vote against the bill. Florida freshman Tim Mahoney.

Representative TIM MAHONEY (Democrat, Florida): When you start changing the taxation, you're potentially changing the whole investor psychology, and we're not in a situation in this economy where we can inadvertently do something that will, you know, restrict capital going to small business.

ELLIOTT: But House leaders say Congress has to make up for giving middle-income earners relief from the alternative minimum tax. The plan faces an uphill battle in the Senate, and the White House has promised to veto.

Debbie Elliott, NPR News, the Capitol.

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