When Iowa Senator Charles Grassley was traveling through the southern part of his state last week, he treated two staffers to ice cream at a local Dairy Queen. When it came time to pay for the $2.75 desserts, he dug through his wallet and pulled out three rumpled discount coupons.

Grassley, 73, the ranking Republican on the Senate Finance Committee, has a net worth of more than $2.4 million. Still, he pinches pennies and loathes wasting taxpayers' money. That Puritan streak has made him the driving force in a bid to close tax loopholes for some private-equity firms and hedge funds, breaks he says cost the Treasury of billions of dollars.
Publicly traded companies such as Blackstone Group LP currently avoid paying the 35 percent corporate income tax. As a partnership, their executives pay taxes at the 15 percent capital-gains rate, a practice Grassley says is unfair.
With Grassley beating the drums and largely sympathetic Democrats who hold a majority in Congress getting behind the drive, odds are rising that financial companies will face higher tax bills.
“Grassley is particularly offended by things like this,” says John Chapoton, partner at Brown Advisory in Washington and a former Treasury assistant secretary for tax policy under President Ronald Reagan.
To critics -- many of them anti-tax Republicans who applauded his earlier moves to cut capital-gains rates -- Grassley's efforts are misguided and will penalize some of the nation's most dynamic financial-services companies.
“This is a specific issue where he has definitely gotten it wrong,” says Pat Toomey, president of the Club for Growth, a group that supports anti-tax candidates. When I see this private-equity stuff it drives me up the wall.
Asked about tax penalties on some practices at hedge funds, President George W. Bush said last week: We don't support that. Grassley shrugs off the criticism.
I'm going to do it regardless of how unpopular it makes me.
Grassley, Montana Democrat Max Baucus and other Democratic lawmakers are looking for ways to shield middle-income taxpayers from the alternative minimum tax, in part by recovering billions of dollars of revenue lost when wealthy people and companies use tax shelters and avoidance schemes.
The pair proposed legislation that would make publicly traded buyout firms and hedge funds pay the same tax rates that corporations do.
“If they decide to go public and have the benefits of going public, then they are a corporation and they ought to be taxed as a corporation,” Grassley said in an interview in Sidney, Iowa, last week.
Grassley is still pondering a related issue -- House Democrats' efforts to raise taxes on income earned by investment managers at hedge funds and private equity firms, known as carried interest, which is now taxed as capital gains. (Source: Bloomberg