Somewhere on Wall Street there is a hedge-fund manager ruing the day he gave money to a Democrat in 2006. On Nov. 9, the House passed a plan that would raise taxes on the lofty fees and bonuses that hedge-fund and private-equity managers receive. This has placed Senate Democrats, who will next take up the measure, in a quandary. They are compelled to fix the alternative minimum tax (AMT), which hurts big swaths of the middle class even though it was created to ensure that the very rich could not entirely escape paying income tax. But in doing so, the Democrats might have to raise taxes on a particularly lucrative donor base.
Since the AMT isn't indexed to inflation, more Americans are affected every year. If Congress doesn't act soon, about 21 million will be penalized. House Ways and Means chairman Charles Rangel has proposed a one-year stopgap fix that would exempt these middle-income taxpayers from the AMT, at a cost of more than $50 billion. The problem? In a fit of fiscal prudence, the Dems earlier this year passed a requirement mandating that Congress pay for everything it does with either tax hikes or budget cuts. Cue the proposed hedge-fund tax increase.
Many Senate Democrats are lukewarm to the idea. After all, investment firms and their employees have contributed nearly $50 million to political campaigns so far in the 2008 election cycle--more than 60% of that money to Democrats. Fortunately for wary party members, President George W. Bush has promised to veto any tax increases. "Why risk losing all those contributions when the President's going to veto it anyway?" said Bob McIntyre, head of Citizens for Tax Justice. Since there won't be enough votes to override a veto, this Congress will probably have to pay for the tax fix the way its predecessors always did: by adding to the deficit