Under Levin's bill, any income received from a partnership in compensation for services provided would be subject to ordinary tax rates. Currently, the compensation is taxed at the 15 percent long-term capital gains rate instead of the ordinary tax rate of up to 35 percent. Fund managers could apply the capital gains rate of 15 percent only on capital they actually invested themselves in the partnership.
President Barack Obama's budget proposal included a similar proposal to close the so-called "carried interest" tax loophole for managers of the funds in fiscal 2011 as a way to generate more federal revenues.
Carried interest is the cut of profits that private equity and hedge fund partners typically keep as their compensation.
"This is a basic issue of fairness," Levin, a member of the tax-writing House Ways and Means Committee, said in a statement. "This proposal is not about taxing investment, it's about ensuring that all compensation is treated equally for tax purposes."