Paulson cautious on hedge fund tax

The Baltimore Sun

Treasury Secretary Henry M. Paulson Jr. warned yesterday against "unintended consequences" of efforts to tax hedge funds and buyout firms.

At a conference organized by The Wall Street Journal in New York, he also said Congress shouldn't punish Blackstone Group LP with higher taxes because it became a publicly traded partnership.

Senate legislation would force Blackstone to pay taxes at corporate rates of 35 percent instead of as a partnership, with a burden as low as 15 percent.

Paulson said other industries use the partnership model, noting real estate and construction.

"We have tended to single out companies and industries to respond to the pressures of the moment," he said. "We need to think comprehensively. We need to be careful of unintended consequences."

Paulson, former chief executive officer of Goldman Sachs Group Inc., was the second senior Bush administration official yesterday to raise concerns about bills introduced this month in Congress that would raise taxes for Blackstone and many managers of hedge funds and buyout firms. White House spokesman Tony Snow also suggested that the administration will oppose such an effort.

"This is not an administration that's predisposed toward tax increases," Snow told reporters yesterday morning. He said at a later briefing that he was speaking generally and wasn't addressing specific legislation.

"We're going to take a look at what Democrats have to offer," he said.

The tax structure of hedge funds and buyout firms has drawn congressional attention in the wake of billion-dollar paydays for fund managers.

Senate legislation, introduced June 14 by Finance Committee Chairman Max Baucus, a Montana Democrat, and Charles E. Grassley, an Iowa Republican, would penalize financial firms that become publicly traded partnerships.

House legislation, introduced June 22 and backed by top Democrats, would tax the share of profits that managers receive for investment services at ordinary income-tax rates as high as 35 percent and affect all partnerships, public and private. Currently, that income, known as "carried interest," is taxed at capital gains rates as low as 15 percent.

Lisa McGreevy, executive vice president of the Washington- based Managed Funds Association, the primary lobbying group representing hedge funds, said last week, "This is not about compensation for services. This is about the nature of long-term investment and capital formation."

Earlier in the day, Michael Graetz, a Yale University tax professor who served in the tax department of President George H.W. Bush's Treasury Department, endorsed both the Senate measure and the House bill.

"I think it's odd" that fund managers pay lower taxes on their labor income than their secretaries, Graetz told the Senate Finance Committee in Washington.

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