updated 6/22/2007 1:48:42 PM ET 2007-06-22T17:48:42

Powerful House Democrats on Friday proposed increasing the tax burden on managers of hedge funds and private-equity firms, ratcheting up the debate on expanding the government’s tax grip on Wall Street.

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The bill came as Blackstone Group’s shares leaped more than 20 percent in the private-equity titan’s $4 billion initial public stock offering, the sixth-richest IPO in U.S. history.

Managers who take a share of hedge fund and private-equity fund profits pay taxes at a 15 percent rate, the rate for capital gains. The legislation would hike the rate levied on their compensation, known as “carried interest,” to 35 percent, the level for income tax.

The legislation was introduced by Reps. Sander Levin of Michigan, a member of the Joint Committee on Taxation; Charles Rangel of New York, head of the tax-writing Ways and Means Committee; Barney Frank, the Financial Services Committee chairman, and a host of other Democrats.

“Investment fund employees should not pay a lower rate of tax on their compensation for services than other Americans,” Levin said in a news release. “These investment managers are being paid to provide a service to their limited partners, and fairness requires they be taxed at the rates applicable to service income, just as any other American worker.”

A swirl of publicity in recent weeks over the billions that Blackstone chief executive Stephen Schwarzman is reaping from the IPO provided a backdrop for lawmakers’ expressions of outrage and legislative moves as they target new sources of revenue. Last week, the leaders of the Senate Finance Committee proposed legislation that would raise the tax burden of private-equity firms like Blackstone and hedge funds that go public.

The new House bill would apply to managers of all such investment funds.

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