America’s private equity executives breathed a collective sigh of relief yesterday after the Republican Party rejected proposed legislation that would have cost the industry up to $6 billion (£2.9 billion) a year in additional taxes.

The proposed changes would have increased the taxes that private equity executives pay on their share of their firm’s investment profits, which are known as carried interest, from 15 to 35 per cent.

Since these profits make up the bulk of employees’ total compensation, the private equity industry had lobbied hard against the increase and the Republican Party yesterday ended its legislative passage through the Senate by forcing its removal from a broader tax bill.

Although the Democrats control the Senate, the proposal needed 60 per cent of the vote to ensure that it was passed and, since some Democrats also opposed the measure, it was removed to ensure the safe passage of a wider bill.

Charles Rangel, the Democrat congressman who introduced the proposed tax changes, had argued that private equity firms should pay the 35 per cent top rate of income tax, rather than the 15 per cent capital gains rate that they presently pay on their carried interest.

He contended that, since the bulk of the carried interest comes from money that they invest on behalf of institutions, rather than from their own pocket, private equity executives are not taking a risk and so should not be rewarded with a lower tax rate. 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, Mr Rangel contended.

However, the Republicans, whose party is ideologically opposed to tax increases and generally approves of the impact that the private equity industry has had on the American economy and pension fund returns, disagreed with Mr Rangel and voted against the change.

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