Nov. 9 (Bloomberg) -- A bill to raise taxes on hedge-funds and private-equity executives, designed to prevent an increase on middle-income families this year, was approved by the U.S. House of Representatives in the face of an almost certain veto by President George W. Bush.

The House voted 216-193 to approve the $78.3 billion measure, which spares 21 million households from a surprise tax increase this year because of the alternative minimum tax. It also renews dozens of expiring tax breaks for businesses and contains relief for homeowners facing foreclosure. Eight Democrats opposed the measure; no Republican voted for it.

The bill faces tougher prospects in the Senate, where Finance Committee Chairman Max Baucus said it would be retooled to overcome the opposition of Republicans who want to alleviate the minimum tax without new revenue. Its chances are further diminished by the Bush administration's threat yesterday to veto any measure that is funded by increasing other taxes.

House Speaker Nancy Pelosi of California said passage of the bill represented a ``vote on values for our country'' that ``planted a flag of fiscal responsibility.'' She said House Democrats ``have an understanding with the Senate that for this legislation to go forward it must be paid for.''

Treasury Opposition

After the House vote, Treasury Secretary Henry Paulson called on the Senate to adopt a minimum-tax measure ``that does not raise other taxes.'' Otherwise, he said, millions of taxpayers ``will -- at a minimum -- suffer delays in having their returns processed and refunds paid.''

The author of the House bill, Ways and Means Committee Chairman Charles Rangel, cast the debate as a fiscally responsible choice to reduce taxes on middle-class households while ending what he said was an inequity that allows some of the wealthiest Americans to pay taxes at a lower rate than wage- earners.

``This is not a tax increase, this is a closing of a loophole and you should be proud to participate in that,'' said Rangel, a New York Democrat.

The vote was a defeat for hedge funds and private-equity firms, which have spent $6.1 million this year lobbying against a tax increase. The bill would more than double the tax rate on so- called carried interest, the compensation that executives at buyout and venture-capital firms, as well as real estate partnerships, receive for investment services. The House measure also would require hedge-fund managers to pay tax on income they defer in offshore accounts. The two provisions would generate $49.5 billion over the next decade.

Private-Equity Lobbying

The Private Equity Council, a Washington trade group created in December by 11 buyout firms including Blackstone Group LP, KKR & Co. LP, Carlyle Group, and Apollo Management LP, said it would continue to fight the bill in the Senate, where it may not be taken up before next month.

The group's president, Douglas Lowenstein, said in a statement that the House measure's ``narrow'' margin of victory ``demonstrates widespread concern about this new investment tax,'' which ``could dampen economic growth at a time of an unsettled economy and gyrating financial markets.''

The alternative minimum tax was created in 1969 to deny common deductions for 155 millionaires found to have escaped taxation. It was never indexed for inflation and has increasingly affected more people as incomes rise. If left unchecked this year, the tax will ensnare people with incomes as low as $50,000.

`Patches'

In recent years, lawmakers have limited the number of households that are affected with a series of increasingly costly temporary ``patches'' such as the one approved today. Rangel's bill would exempt the first $44,350 of a single person's income from the levy and the first $66,250 of a married couple's income.

The debate this year has centered on balanced-budget rules imposed by the Democrats when they took over Congress in January that require all tax cuts or spending increases to be offset with tax hikes or spending cuts.

Republicans such as Representative Eric Cantor of Virginia have said the measure is ``class warfare'' that trades tax relief for the middle-class for tax increases on investors that risk damaging the economy. The bill would require carried interest to be taxed at rates as high as 37.9 percent instead of the current capital-gains rate of 15 percent.

`Tax Increase'

``What is now happening is the majority is saying instead of having this tax increase let's have some other tax increase,'' said Wisconsin Representative Paul Ryan, the top Republican on the House Budget Committee.

Democrats said the measure was an issue of fairness.

``You've got 23 million families on one side with incomes as low as $40,000 and on the other side there are 35,000 to 50,000 people whose combined income was $930 billion,'' said Artur Davis, an Alabama Democrat. ``If we have to make choices I want to err on the side of the wide range of middle-income families who are going to be affected if we don't act.''

Lawmakers are under pressure to quickly enact a minimum-tax fix. White House Deputy Spokesman Tony Fratto said yesterday that a delay could hold up as much as $75 billion in tax-refund checks for up to 50 million households because the Internal Revenue Service won't have enough time to change forms and reprogram computers before Americans begin filing tax returns in January.

Bush Veto

At the same time, the Bush administration yesterday threatened to veto any minimum-tax fix that is paid for with tax increases elsewhere. ``The administration does not believe the appropriate way to protect 21 million additional taxpayers from AMT liability is to impose a tax increase on other taxpayers,'' the White House budget office said in a statement. ``The president's senior advisers would recommend he veto the bill.''

The legislation also would renew 13 tax breaks for individuals such as a federal deduction for state sales taxes, and 18 for businesses, such as a research credit. It also contains a new deduction of up to $700 for property taxes that homeowners who don't itemize can claim and lets more low-income families claim the full $1,000 child credit.

Other provisions in the legislation would repeal a program that allows the IRS to contract with private debt collectors such as Sallie Mae's Pioneer Credit Recovery Inc. The bill also would overturn an IRS ruling that subjects 8,500 residents of the U.S. Virgin Islands who earn more than $75,000 to more audit scrutiny than if they lived on the mainland.

In addition, the bill would defer until 2017 a measure allowing companies to lower their U.S. tax bills by attaching U.S. interest costs to their foreign tax bills, a provision objected to by the White House in a veto threat.

It also would raise $3.4 billion in taxes from investors by requiring brokers to report stock-purchase prices to the Internal Revenue Service beginning in 2009, and the price of all other types of securities beginning in 2011. The move is designed to reduce false reporting of transactions by taxpayers.

To contact the reporters on this story: Alison Fitzgerald at afitzgerald2@bloomberg.net ; Ryan J. Donmoyer at rdonmoyer@bloomberg.net