'08 Candidates Walk Political Tightrope on Tax Issue

July 10, 2007 — -- Congress is considering whether a loophole in the tax code is allowing the managers of hedge funds and private equity firms to sidestep billions in income taxes.

The congressional debate has left many 2008 presidential candidates -- especially the Democratic contenders -- walking a political tightrope. Most White House wannabes have accepted millions of dollars in donations from people who manage hedge funds or work at private equity firms.

Republican and Democratic presidential candidates received almost $10 million dollars from securities and investment firms in the first three months of the campaign, according to an analysis of Federal Election Commission data by the Center for Responsive Politics.

A Senate Finance Committee hearing Wednesday explores whether managers of hedge funds and private equity firms are getting an unfair tax break from a loophole in the tax law that allows managers of hedge funds and private equity firms to pay only 15 percent tax on the money they make from investments, called "carried interests."

"This is a glitch in the code," said Marc Gergen, a tax law expert from the University of Texas Law School, who is testifying before the committee Wednesday. "These guys are paying 15 percent income tax rates when everybody else is paying about 35 percent."

Gergen said under the current system, personal profit made by private equity and hedge fund partners -- who mostly invest other people's money -- is considered capital gains, which is taxed at a lower rate than personal income. Critics argue this allows the managers to sidestep paying billions of dollars of taxes, including Medicare taxes.

Some in Congress want to double or triple the tax rates the managers currently enjoy and use it to offset the alternative minimum tax that currently hits middle-class Americans.

Most of the Republican presidential candidates have come out firmly against any congressional effort to change the status quo.

Former Gov. Mitt Romney, R-Mass., has perhaps the strongest ties to private equity and hedge fund money. He made his fortune -- estimated between $190-$250 million -- in private equity, founding Bain Capital in 1984, a lucrative Boston-based private equity firm.