By Kim Dixon
WASHINGTON (Reuters) - As the Republican primary fight splatters mud all over Mitt Romney and Bain Capital, other private capital funds are rushing to distance themselves from the firm co-founded by the presidential contender.
Not only do private equity funds not want to be tarred by accusations that Bain and Romney have been destroyers of companies and jobs, they also don't like the attention that the attacks on Bain are bringing to carried interest.
Campaign trail trouble for Bain and Romney is coming at a bad time for the private capital fund industry as Democrats revive a bid to close the "carried interest" tax break that is central to the sector's business model.
President Barack Obama on Monday called in his 2013 budget for closing the tax break. Democratic Representative Sandy Levin introduced legislation to do that on Tuesday.
"This loophole for years has unfairly enabled some of the highest-paid individuals in the country to sharply reduce their tax bills and it is time to close it," Levin said
Levin's bill would tax private equity and other investment fund managers at the ordinary income tax rate, now topping out at 35 percent, instead of the 15 percent capital gains rate they currently pay on much of their earnings.
No quick decision on this issue, years in the making, is likely from Congress in a presidential election year, but Democrats are certain to keep the issue alive as part of a broader debate on tax fairness.
Feeling the pressure, private capital funds in recent weeks have undertaken a public relations blitz. The Private Equity Growth Capital Council, an industry lobbying group, has launched a publicity and an online advertising campaign.
The Republican primary battle "has raised the interest of members of Congress in our industry. We've been able to respond," said Steve Judge, chief executive of the council.
NOT JUST WALL STREET?
Supporters of former Speaker of the House Newt Gingrich, one of Romney's rivals for the Republican presidential nomination, have been behind a scathing attack on Bain and Romney.
A pro-Gingrich political action committee funded two movies attacking Romney and Bain, including "King of Bain," portraying Romney as a greedy job destroyer.
Romney's career and fortune, estimated at up to $270 million, was made at Boston-based Bain, which he co-founded. Last month he released his 2010 and estimated 2011 tax forms, confirming that he pays about 15 percent of his income in federal taxes, thanks to the same tax break.
The former Massachusetts governor made his wealth as corporate America turned to a new breed of funding sources -- private funds that pumped billions of dollars into businesses.
Some are private equity firms like Bain, which do much of their business buying out often failing companies and cutting costs to make a profit upon re-sale. Venture capital firms invest at earlier stages of a company's development.
Despite their differences, however, private equity, venture capital and certain real estate partnerships in particular share a common feature -- the carried interest tax break.
Real estate developers also want to step away from association with private equity and big Wall Street firms.
"A very large percentage of real estate deals caught up in carried interest are far from the Wall Street investment fund structure," said Steve Schneider, a real estate lawyer and adjunct professor at Georgetown.
Capital raised by private equity firms globally has quadrupled between 1996 and 2011 from $67.7 billion to $275 billion, according to data compiled by Thomson Reuters.
The prominence of private equity firms like Bain, Blackstone, Kohlberg Kravis Roberts and the Carlyle Group, as well as the fortunes their partners have made, has fueled a long-running debate about carried interest.
Executives of private equity, venture capital and partnerships that invest in real estate typically get paid a 2 percent fee and a 20 percent slice of the profits. That last piece gets the maximum 15 percent capital gains tax rate.
This has been the case since for decades, but it was the explosion of private equity and other private investment firms in recent years that led to protests over the tax treatment.
"The tax code has always been structured this way: what changed was the growth of the private equity and venture capital business," said Victor Fleischer, a law professor at University of Colorado, and author of an influential paper on the topic.
Taxpayers could save $13.5 billion over 10 years by closing the carried interest tax break, the Obama administration estimated on Monday. That cost level makes the provisions small by comparison with other corporate tax breaks.
Also small is the exclusive slice of 138 million working Americans who benefit from the carried interest break
Exact numbers of how many people take advantage of it are hard to come by. About 6,300 principals at venture capital firms likely enjoy some version of the break.
There are about 2,300 private equity firms with a varying numbers of partners. Real estate partnerships also make up a good chunk of those whose taxes could be affected if it went away.
Blackstone President Tony James in recent weeks lamented the attacks in a conference call with reporters.
"It is distressing to all of us here ... to witness the vicious, politically motivated attacks on the private equity business that are both inaccurate and unfair," James said.
(Reporting by Kim Dixon; Additional reporting by Greg Roumeliotis; Editing by Kevin Drawbaugh and Steve Orlofsky)