Seven witnesses testified today before the U.S. Senate Finance Committee on the question of whether investment fund managers should pay more than the 15% capital gains tax they now pay on the "carried interest" they receive as part of their compensation for managing such funds. The Senate is considering a proposal to begin treating that money like ordinary income - something that could more than double the tax rate on it for most fund managers.

The witnesses were split about evenly, with four being in favor of the increase and three arguing against it, according to CNN Money News. China Venture News first mentioned the tax hike story in late June.

Carried interest is the percentage of profits that general partners in a private equity fund receive out of the profits of the investments made by the fund they help manage. Usually that comes to between 20% and 25% of the fund's profits. In the past that money has been viewed as capital gains on an investment; but many fund managers invest little (if any) of their own money in the funds they work with. If the money was treated as compensation for services rendered by the fund managers and taxed as ordinary income, the tax rate on that money could go from the current 15% on capital gains to as much as 35% - the highest rate on personal income at the moment.

According to CNN, one of the witnesses, William Stanfill, compared the tax rate he pays on money he earns as a partner at an investment firm with the tax rate his child's teacher pays. Stanfill said that as an investment fund manager, he pays a lower tax rate on carried interest than the teacher does on his salary. "We get ample compensation, financial and psychic, for the work that we do - from managing others' money - in the form of a share of the profits," Stanfill said. "I don't think it's fair that teachers and firefighters subsidize special tax breaks for me."

Other witnesses argued that the lower tax rate paid by fund managers is justified for a variety reasons. Such investment funds, they argued, provide a service to society, stimulate the economy and create jobs.

To the extent that many venture capital and private equity funds that invest in China are based in the U.S., the proposed U.S. tax changes could impact venture capital investment inside China. The U.S. House of Representatives has already voted in favor of such legislation.