Phil Kerpen

By PHIL KERPEN
July 30, 2007

Not content to merely spend the record influx of cash coming into the federal treasury, some members of Congress are pushing to hike the capital-gains tax on so-called "carried interest" -- the share of partnership profits, typically 20%, that hedge-fund and private-equity investment managers have not sold to their outside investors. This would be nothing more than a punitive tax on those the congressmen perceive to be making too much money.

This is the same kind of thinking that led Congress in 1969 to enact the Alternative Minimum Tax. An effort to "soak the rich," the AMT was supposed to fall on the 155 households that, because their income was mostly dividends from municipal bonds, paid no federal income taxes. But, because lawmakers conveniently forgot to index the AMT for inflation, it now hits an increasingly large portion of upper middle income folks, especially those in "Blue States" such as New York, New Jersey and California, who write off large state and local income taxes on their federal tax returns.

These two tax issues have become linked recently, with plans afoot to use higher taxes on carried interest to pay for the supposed cost of preventing the AMT from ensnaring more middle-income taxpayers. Because the problems have become intertwined, a workable solution should address both.

Read the full op-ed on WSJ.com.