Taxing Private Equity/Hedge Funds

Congressional hearings were held today to discuss the merits/demerits of taxing private equity/hedge funds in a higher bracket. I did some research on the actual issue here and this is what I found out:

US Taxation
- Income or Corporate tax is about 35% (average let's say)
- Capital Gains tax (tax assessed on any investments made) is 15%
- Law for Capital Gains tax was made in the early 20th Century to encourage people to invest
money and start business from scratch. The low 15% tax bracket was a way of rewarding their hard work as well for taking risk by investing THEIR OWN money in a business.
- Since the 1920s Capital Gains has been assessed to profits made via any investment (stocks, bonds, etc). Again remember in a majority of the cases you are investing YOUR own money.

UK Taxation
- Capital Gains tax is roughly 10%. Income and Corporate tax is higher than in the US

Current Operation of Private Equity firms and Hedge Funds
-Majority of the time money from a "third party" is used for investment.
-Some of the time the firms themselves contribute to the investment pool.
-Profits from these investments are divided up this way:
Hedge Fund Charges: 2% of Total Assets being managed (regardless of profit or loss on investment)
Hedge Fund Profit: 20% of Total profit from investment. (this will be zero if there is a loss)
Investor: Remaining profit

Current Tax Brackets for Hedge Funds and Investors
- Investors: 15% of remaining profit
- Hegde Funds: 15% of Hedge Fund Profit+Charges


So, the debate now is that some government types (probably jealous that the Hedge Funds and Private Equity types are reeling in all this money) want the Hedge Fund profits to be taxed in the 35% bracket instead of the current 15%. Why? Because they claim that when these Hedge Funds and Private Equities are not actually investing THEIR OWN money why should they be able to claim the Capital Gains Tax bracket (remember this was constitutionally created to encourage risk taking by investing own money). Hedge Funds and their lobbyists are claiming that by moving to the higher tax bracket investors will be discouraged to take risks in the financial markets (as returns will be low) and this in the end will affect the economy negatively (they have other reasons in there as well).

My opinion: Politicians are raising this up to show that they care about the common man/woman and in the process improve their electoral chances. They are also probably jealous that all this money is being made. On the other side, hedge funds and private equity firms are taking advantage of a loophole that currently exists. Can't blame them for that. However, the the Hedge Funds and Private Equities and their lobbyists contention that this will affect the markets is bogusl-people will do whatever it takes to make money, a little higher tax is not going to discourage people in the long term. But this sort of behavior by both parties is expected since this is politcal theatre.

Here a couple of articles that discuss this issue:
Economist.com: http://www.economist.com/opinion/displaystory.cfm?story_id=9302718
seeking alpha blog: http://financial.seekingalpha.com/article/40097