The kings of private equity are facing a big political challenge, reports the New York Times. Sen. Charles Grassley, R-Iowa, is threatening that they will have to pay regular income tax, and not capital gains tax, on the fees they pay themselves out of their deals.

The difference is a tax rate of 15 percent versus the 35 percent most of us pay on money we earn. How so the PE boys get away with it? The fees are calculated as capital gains despite the fact that most deals are structured so that the actual dealmaking firms are mostly playing with other people’s money. Even the biggest deals like Harrah’s will get the bulk of the funds from investment banks, not the equity partners.

So, should the fees they charge be considered capital gains or income? If you or I charge for our services, it’s income and that’s what it should be for the private equity people too. Still there’s plenty of angst about all this but the private equity outfits only have themselves to blame.

They think it’s a PR problem but reaping huge rewards, manipulating the tax code and pretending that they’re also doing a public service is too much for even the cleverest public relations expert to sell. It’s that combination that has gotten them into trouble. So the Private Equity Council will be facing a big challenge in Washington: There are Republicans who want to increase their taxes. They must have worked very hard to create that kind of a problem.