Private equity executives have hit back at the American Democratic Party’s campaign to more than double their taxes by switching their financial contributions to the Republicans.

Staff at the biggest buyout firms, who traditionally have donated far more to the Democrats, funnelled 53 per cent of their $493,000 (£242,000) presidential campaign contributions to leading Republican candidates in the first half of 2007.

This is a dramatic increase on the 31 per cent of private equity contributions that went to Republican candidates in the 2004 presidential and congressional elections, according to the Centre for Responsive Politics, a research organisation.

Private equity firms have changed their financial allegiance as the Democrats’ campaign to raise their taxes has gathered momentum. The party’s leading presidential candidates – Hillary Clinton, Barack Obama and John Edwards – have lined up in recent days to support the tax rises, which many Democrats have been demanding for weeks.

The support of the candidates for the campaign threatens to extend the Republicans’ lead in private equity contributions. It could also hit the Democrats’ fundraising efforts more generally, since private equity executives often use their vast networks of financial contracts to raise money on behalf of candidates.

Private equity executives pay 15 per cent capital gains tax rate on their carried interest – or share of the firm’s investment profits – which makes up the bulk of their earnings.

Critics argue that they should pay 35 per cent, the top rate of income tax, because the bulk of the carried interest comes from money that they invest on behalf of institutions, rather than from their own pocket. The lower capital gains tax rate is intended to provide an incentive to encourage people to invest their own money and so take a risk, they contend.

The stage for a showdown was set in November, when the Democrats regained control of the Senate and of the House of Representatives. The issue of private equity taxation began to build momentum in March, when Blackstone bosses announced plans to float, forcing their tax treatment into the open, along with the vast wealth that the private equity executives were accumulating.

In addition to its proposal to increase taxes on private equity chiefs, Congress is also debating legislation that would increase taxes paid by publicly quoted investment firms, again from 15 per cent to 35 per cent. As America’s presidential candidates stake out their positions, the Republicans have opposed changes to private equity taxation, arguing that it would discourage investment and harm the American economy.

Some Democratic candidates have decided to put taxes at the centre of their manifestos as they seek to tap the growing dissatisfaction among America’s middle classes with the country’s growing super-rich. They would use the estimated $4 billion to $6 billion that the tax rise on carried interest would produce to fund initiatives such as health and education reforms.

Democratic presidential candidates have been wary of being too aggressive towards private equity firms because they are large political donors and are very well connected, but they appear to have decided that they cannot turn their backs on an issue that is so central to Democrat ideology.

James Lucier, an independent political analyst, said: “The fact that it has taken them so long to comment on the issue is because they wanted to keep the bridges open to private equity and hedge funds for as long as possible.” The Centre for Responsive Politics data shows that in the first half of this year Rudy Giuliani, Mitt Romney and John McCain, the leading Republican candidates, received $262,000 in contributions from the 11 private equity firms that make up the Private Equity Council. Meanwhile, they gave only $231,000 to Mrs Clinton, Mr Obama and Mr Edwards.

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