Rangel's bill would tax hedge-fund compensation as regular income at the 35 percent top rate, instead of the current 15 percent capital-gains rate paid now.

That's when powerful, well-funded lobbyists, bankrolled by hedge-fund managers, went to work. It wasn't long before Schumer, the Democratic Senatorial Campaign Committee chairman who has raised millions from these same financial managers, came out against Rangel's soak-the-rich, anti-investor bill.

Democratic Sen. Max Baucus of Montana, the Senate Finance Committee chairman who said the tax hike was a bad idea and would never pass in the Senate, followed Schumer.

Other Democrats are squirming over the tax-the-rich scheme as well. Rep. Rahm Emanuel of Illinois, the House Democratic Caucus chairman, wants a stand-alone fix for the AMT without a tax-hike offset, worrying that it could hurt Democrats in November. Some Democratic Blue Dogs have criticized the tax-hike offset, too.

Democratic analysts readily acknowledge what's going on here. "As far as the hedge funds and tax breaks go, the Democrats are clearly getting a lot of money from people who are affected by that, and they're responding," said Dean Baker, co-director of the liberal Center for Economic and Policy Research.

This is a story with profound political implications for Democrats who will have a hard time bashing Republicans next year as the party of the rich once the story gets out that they are protecting immensely wealthy hedge-fund managers from the IRS.

"The demographic reality is that the Democratic Party is the new party of the rich," Franc says.

Is this the kind of man-bites-dog story that we are likely to see reported on the nightly news shows? Don't hold your breath.