In Opposing Tax Plan, Schumer Breaks With Party

WASHINGTON, July 29 — June was a busy month for Senator Charles E. Schumer. On the phone, at large parties and small gatherings around the nation, he raised more than $1 million from the booming private equity and hedge fund industries for the Democratic Senatorial Campaign Committee, of which he is chairman.

But there is another way Mr. Schumer has been busy with hedge fund and private equity managers, an important part of his constituency in New York. He has been reassuring them that he will resist an effort led by members of his own party to single out the industry with a plan that would more than double the taxes on the enormous profits reaped by its executives.

Mr. Schumer has considerable say on the issue. In addition to being the third-ranking Democrat in the Senate leadership, he is the only Democrat serving on both of the major committees, Banking and Finance, that have jurisdiction in the matter.

He has long been a pro-business Democrat and a fund-raising machine for the party, as well as a vociferous supporter of Wall Street issues in Washington, much the way Michigan lawmakers defend the auto industry and Iowa politicians work on behalf of corn farmers.

But in the case of the tax proposals, the strategy behind Mr. Schumer’s efforts is putting to the test another set of principles he is known for. He has regularly portrayed himself as a progressive politician who identifies with the struggles of the middle class and is sharply critical of the selfish “plutocrats” who he says control the Republican Party.

And he has written a book on the subject, advising policy makers to follow his strategy of deciding positions by identifying with the concerns of people like the Baileys, a fictional middle-class family from Long Island that he uses as a guide.

Now, leaders in his party are using similar language to justify their efforts to raise taxes on hedge funds and private equity firms, saying the new revenues will help pay for health and education programs and begin to reduce the impact of the alternative minimum tax on the middle class. The proposals have gained momentum in recent weeks but face formidable political obstacles, primarily in the Senate.

This month three leading Democratic candidates for president — Hillary Rodham Clinton, Barack Obama and John Edwards — endorsed the tax-increase proposals.

Mr. Schumer said in an interview that he was torn between the need to protect an industry vital to his home state and the need to generate revenues to finance government programs. He said a tax increase on private equity and hedge fund executives could lead to an exodus of jobs and companies from New York, and even from the country. He said the plan, if enacted federally, would also lead to an increase in New York State tax that would further bear down on the industry. He said he worried that the industry was being unfairly singled out.

“Unintended consequences often occur when you do major tax work. And you have to be careful,” Mr. Schumer said in the interview, held in his office just off the Senate floor.

But even some of Mr. Schumer’s fellow New York Democrats dispute that notion, including Representative Charles B. Rangel, the chairman of the House Ways and Means Committee, which has jurisdiction over tax matters.

“If the businesses are so fragile that taxing them at an equitable rate will cause them to leave the city, I can’t picture that,” Mr. Rangel said.

Among the other prominent Democrats from New York to endorse raising taxes on the industry is Robert E. Rubin, the treasury secretary to President Bill Clinton, who has returned to Wall Street as a senior executive at Citigroup.

Some Republicans have taken a more jaundiced view of Mr. Schumer’s intentions. As Senator Charles E. Grassley, the ranking Republican on the Senate Finance Committee, put it in a recent interview with Bloomberg News: “They contribute most of their money to the Democrat Party, and he wants to protect the income. It’s completely contrary to the position he took in the last election, when he was leading the Senate Democratic campaign committee and he talked about the inequity of the tax system.”

Later, in a statement to The New York Times, Mr. Grassley said, “I can sure understand that Senator Schumer has to represent his constituents’ economic interests, and some of those are financial people on Wall Street.”

Mr. Grassley is a co-sponsor of legislation filed last month by Senator Max Baucus of Montana, a Democrat and the chairman of the Finance Committee, that would raise to as much as 35 percent the 15 percent corporate tax rate on certain partnerships that go public, like the Blackstone Group and Kohlberg Kravis Roberts.

In June, senior House Democrats separately proposed raising the tax rate on the investment gains of fund managers — known as “carried interest” — to the ordinary income tax rate of as much as 35 percent, from the capital gains rate of 15 percent.

If adopted, the House proposal would more than double the tax rate for most of the compensation received by the partners at private equity and hedge funds and would raise billions of dollars annually in tax revenue.

Mr. Schumer discounted any suggestion that the campaign contributions from the industry had influenced his thinking, and said he had heard from industry executives who supported some of the proposals to raise their taxes. But interviews with people in and outside the industry indicate that there is overwhelming opposition to the measures and that any support from within the industry ranks is token.

Joe Schocken, the chairman of Broadmark Capital, an investment banking and private equity firm in Seattle, said most others in the industry did not seem to share his support for a tax increase that would make the tax code fairer and raise revenue for the federal government. “I realize I am pretty lonely in that point of view,” he said.

Mr. Schumer has said he agrees with the general notion that Congress needs to raise more money for vital initiatives, and that the nation’s wealthiest should bear much of that burden. “I am not a populist, but I am a pro-government-type person who believes the government needs some revenues, and the only logical place to get it is from the very top end income-wise,” he said in the interview.

But in his conversations with Wall Street executives about the tax proposals, Mr. Schumer said, he has told them that he would oppose a tax increase as long as it did not also apply to other industries, like energy and real estate.

Both in and out of Congress, supporters of increasing taxes on hedge funds and private equity firms say Mr. Schumer’s proposal is a “poison pill” that would generate opposition to the measure from powerful groups — the energy and real estate industries — and derail its prospects for passage.

In the interview, Mr. Schumer acknowledged that expanding a tax increase to other industries might make it harder to pass. But he said the change also would make the plan fairer and raise more money.

“It’s fair for New York,” he said. “Almost no one I speak to disagrees with that proposition, that it’s right.”

As a campaign fund-raiser, Mr. Schumer has raised significantly more money than his Republican counterparts, largely because contributors sense that Democrats are headed toward victory in 2008. But the tax issue has significantly helped the Democratic fund-raising efforts.

From January through June, the Democratic Senatorial Campaign Committee raised nearly $2 million from executives and employees of private equity and hedge fund firms like the Carlyle Group and the Blackstone Group, according to analyses of campaign finance disclosure reports conducted by the Center for Responsive Politics, a nonpartisan group that researches the influence of money in politics, and by The New York Times. The $2 million figure, which includes contributions from relatives of employees and executives, is a low-end estimate because many donors do not list their employers on financial disclosure reports.

Industry executives say they value the role Mr. Schumer plays. John G. Gaine, the president of the Managed Funds Association, the main hedge fund trade group, described the senator as a “critical figure in the debate” and a “guardian of America’s capital market and, more parochially, New York’s economic interest.”

Mr. Schumer says he is working on an alternative tax plan, the details of which he would not disclose. But in the interview he spoke approvingly of raising the tax rate on the wealthiest 1 percent of Americans — those earning more than $400,000 a year — to 40 percent from 35 percent. He added that Congress could also once again set the capital gains tax rate at 20 percent, raising it from the current 15 percent.

He acknowledged the political reality that such an approach would be hard to get through Congress. But he suggested that it would be fairer than imposing all of the additional tax burden on an industry that is largely centered in his state. “It’s consistent and it’s right, and it doesn’t single out New York,” he said.