Investment pros fear new tax will cut their fees

White House budget director Peter Orszag, among others, have said they expect Congress will finally move to tax venture capital, buyout and real estate fund fees like other income, instead of taxing it at the lower capital-gains rate, according to Scott Hendon, a partner in national accounting firm BDO's private-equity practice.

That means investment managers will have to pay 35%, instead of the recent 15%, of their fund profits to Uncle Sam. (Or more: Both income and capital gains tax rates for rich people may rise as Obama and Congress try to pay down the budget deficit.)

Fund managers are mobilizing to preserve their privileged lower tax rate. "Today every member of Congress will receive a letter signed by more than 1,400 chief executive officers, founders and entrepreneurs urging lawmakers to... retain a long-term capital gains tax incentive for venture capital carried interest," says a statement sent out by the National Venture Capital Association's Wallingford-based spokeswoman, Emily Mendell.

"They want to pass a bill by Memorial Day, so they'll need to get legislative language together this week," Mendell told me. "Congress is going to tax carried interest," which is to say, managers' share of fund profits. "The question is, to what extent? Will they make exceptions for longer-term investments," and for small investments in new companies?

She said Sen. Bob Casey, D-Pa., is among four Democratic Senators who have signed a letter urging Senate leaders to protect venture capital managers from higher rates.

"A vote to double the taxes of venture capitalists is a vote against U.S. innovation, job creation, and global economic leadership," NVCA insists. Though the tax would affect investment managers' profits, typically 20% of a fund's returns, not the 80% that goes to the actual investors whose money is at risk. And do fund managers really deserve lower tax rates than CEOs, doctors, lawyers and other well-paid Americans?

Mendell answers that CEOs, at least, do get the lower capital-gains tax - "when they sell their companies." She adds,  "The idea here is that venture capitalists' investment, time and money for the long term into creating assets that did not exist before: companies and jobs. If you believe in the capital-gains tax philosophy, venture capital investment should qualify," for fund managers as well as investors.