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Lawyers: Obama likely to raise taxes on private equity

When Barack Obama is sworn into the White House in 2009, private equity firms can expect some changes, among them likely increases to capital gains and carried interest taxation. However, his election also could prompt a greater willingness by overseas investors to invest in the US.

Capital gains and carried interest are “highly likely” to see taxation hikes in the early days of a Barack Obama presidency, according to industry lawyers speaking to PEO's sister website PERE.

Following yesterday’s historic US presidential election, which saw Democrat candidate Obama overwhelmingly beat his Republican rival, John McCain, attorneys specialising in private equity and real estate fund formation said taxes would be among the early contenders for change.

Josh Sternoff, a partner of New York-based law firm Paul Hastings, said Obama had “explicitly” highlighted carried interest as a possible target for tax increases, and following the Democratic Party’s new majority in the Senate, as well as their existing majority in the House of Representatives, it could be one of the issues “targeted for early term changes”.

“Nothing about this victory indicates a move away from the proposal to tax carried interest as ordinary income. The devil will be in the detail, but there should be no doubt that this administration will be looking for revenue sources and revenue offsets for the things the new administration wants to do,” Sternoff said.

Capital gains also was another area of contention for the President-elect, according to Scott Arnold, leader of King and Spalding’s real estate group and co-head of the law firm’s real estate capital markets group.

Throughout the campaign, Obama has pledged to increase the capital gains rate in the US to 20 percent for couples making more than $250,000 and for individuals earning more than $200,000.

Arnold said the private equity industry should be “anticipating tax increases at every available point”, however he said the new administration could not ignore the economic situation, which was the “gorilla in the room” for Obama. “It’s fair to say any tax increases at any point might dampen transaction activity, and that’s the big problem for the US economy right now.”

Obama’s election also could herald increased investment activity in the US, Arnold added, not least with European and Middle Eastern investors.

“I do think his election will generate a greater willingness to invest in America. Whether financial conditions in those regions permit that is an entirely separate question,” he said.

As Obama prepares to appoint key members of his administration, the private equity industry will be following events closely, Sternoff said.

The overall stewardship of the US economy was vital to the future health of the private equity market, not least in freeing up the credit markets, he said. “People will be looking for indications that Obama has a steady, reassuring hand on how to tackle this economic crisis, and who he appoints as Treasury Secretary will be vital to private equity.”