The Carried Interest Tax Controversy
I. Introduction
It has been over two decades since debate erupted in prestigious law journals, tax notes, and Congressional committees about a little known but highly controversial tax rule pertaining to the “carried interest” component of compensation paid to the managing partners of private investment partnerships, more commonly known as private equity funds.
Under current tax rules, carried interest is taxed at a capital gains tax rate of 23.8% rather than at much higher ordinary income tax rate of up to 40.8%. Supporters of this rule claim that it is a just reward for the risks undertaken by the sponsors and managers of these investment funds. Opponents claim that the tax preference awarded to carried interest is basically a veiled subsidy to the managers of private equity funds, whose income should be taxed at the higher ordinary income rate.
Private equity funds constitute an important sector of the U.S. economy. They own or partner with no less than 21,000 portfolio companies, employ over 13 million workers (mostly in companies with fewer than 500 employees,) and account for 7 percent of U.S. gross domestic product.[1]
The debate over the appropriate tax status of the managers of private equity funds remains unresolved in the halls of Congress in the sense that the decades-long defense of the current carried interest tax preference by the investment industry has not deterred opponents from repeatedly filing legislation that would change the rule.
With the recent submission of yet another bill in Congress to reform the carried interest tax regime (Ending the Carried Interest Loophole Act of 2026), this debate has taken on immediate import and increased public scrutiny – as it has in previous Presidential and mid-term election years.
The issues involved in the carried interest tax controversy include matters pertaining to partnership law, a tax preference for some of the nation’s wealthiest citizens, tax revenue loss for the federal government, the power and influence of great wealth in Congressional rulemaking, and whether the current carried interest tax regime is consistent with foundational values underlying our democracy.
Both supporters and critics of the current carried interest tax rule have tended to focus their arguments on the law and economics involved. Less attention has explicitly been paid to the multi-faceted principle of fairness in discussing the choices that an historically reluctant Congress will need to make in considering the recently submitted reform bill. The principle of fairness is, of course, foundational to all democracies.
With the hope of enriching the continuing debate over the future of the carried interest tax regime, I re-introduce in this essay the principle of fairness and demonstrate its utility in framing the debate of how best to resolve the long-standing controversy surrounding the tax treatment of carried interest.
I also apply the principle of fairness in a review of the influence process surrounding Congressional rule-writing for carried interest, showing how the current process for legislating carried interest tax rules has become tainted by the outsized influence of money in politics – which has become such a devastating threat to public confidence in our system of democratic governance.
I should point out at the outset that there are dozens, or even hundreds, of preferential tax provisions that could be subject to an analysis like the one presented here. A large percentage of these tax preferences and loopholes survive because in the negotiations surrounding large, infrequent tax bills in Congress, it easy for narrow tax provisions like carried interest to survive when seemingly bigger issues are at stake. But these many preferences inevitably aggregate to substantial amounts of lost tax revenues and contribute to the well-documented perceptions of normal tax-paying citizens that the nation’s governance system is not serving their needs. This is why the specific carried interest example presented here has great symbolic value and interest. Tax preferences and loopholes like the carried interest regime are an albatross around democracy’s neck.
The scope of this essay, to be clear, does not include an assessment of the strategies, conduct, and performance of private investment funds. That would be a much broader story than the one told here, with chapters showing that there are remarkable case histories to be celebrated and others to be roundly condemned. Rather, this story is more narrowly focused on the legal, economic, political, and ethical issues surrounding the compensation of those who sponsor and manage these funds – as a high priority for any Congressional review of the private equity sector.
II. What Is Carried Interest?
“Carried interest” refers to the share of profits that is paid to the general partners of investment partnerships – such as buyout funds, venture capital funds, and some real estate and hedge funds.[2] In the following discussion, I focus on buyout funds and venture capital funds, collectively known as private equity funds, because they are at the center of the carried interest controversy.
Buyout funds typically acquire underperforming companies or corporate divisions, often with large amounts of debt, with the intent of improving their financial performance and reselling them at a profit, usually within five to seven years. Venture capital funds invest in new business with promising prospects. Unlike buyout funds, venture capital funds cannot dictate the timing of selling portfolio companies, but a good planning assumption is a base-case holding period of seven-to-eight years for early-stage startups.
Private equity funds are typically structured as a partnership where the organizing or sponsoring managers of the fund serve as “the general partner” (GP) responsible for the investment strategy of the fund. The GP typically contributes 1-2% of fund capital – as opposed to the partnership’s limited partners (LPs) who contribute most of the capital[3] – but receive as much as 20% of fund profits.[4] The right to receive a percentage of fund profits without an obligation to contribute proportionally to the fund’s capital is the defining feature of carried interest and the root of continuing controversy.
The precise percentage of fund profits paid to the GP varies by type of fund. Venture capital funds typically pay a straight 20% of all income generated to the GP; buyout funds typically pay their GP’s only after the LP investors have received back their original investment plus a minimum specified return (commonly 8%).
GPs do not pay any tax on carried interest until a profit is tangibly generated through the sale of the fund’s underlying assets (its investments in operating companies). In this sense, carried interest is a form of deferred compensation and deferred tax payments.
Once carried interest is generated through a sale of fund assets, it is taxed at the preferred capital gains tax rate.[5]
Carried interest comprises the lion’s share of compensation paid to the operating partners and leaders of private equity firms. According to a 2023 Heidrick & Struggles survey, the carried interest as a percent of total compensation (salary, bonus, and carried interest) ranged, on average, from 70 percent for smaller firms to as much as 90 percent for the largest firms.[6]
III. Economic Effects
The direct effects of the lower, preferential tax rate for carried interest are economically significant. In the first instance, the low tax rate applied to carried interest deprives the federal government of tax revenues that could be available for such public benefits as healthcare, education, and infrastructure. In addition, this tax treatment has led to an extraordinary surge in the wealth of private equity fund managers, many of whom are among the wealthiest Americans.
The precise amount of “forgone” federal revenue due to taxing carried interest at the gains tax rate rather than at a higher ordinary income tax rate has been variously estimated over the years. Most recently, Yale University’s Budget Lab has estimated a ten-year revenue penalty for the U.S. Treasury at $87.7 billion. It also estimates, based upon new data from electronic IRS Schedule K-1 filings, that eliminating the carried interest tax preference could raise $88 billion $100 billion in tax revenue over the next ten years, nearly double prior congressional projections. [7] (Industry groups have criticized the Yale model claiming that its model fails to account for real-world changes in taxpayers’ behavior if the tax rule changes and that the model’s revenue projections overstate likely gains.)
Although the size of this estimated tax revenue penalty is miniscule relative the 2025 federal budget of $7 trillion, the persistence of the carried interest tax rule is a noteworthy example of successful lobbying and rulemaking by the nation’s wealthiest for the extreme benefit of the wealthiest, precisely at a time when many tax-paying Americans have not seen their real wages increase in decades and are experiencing increased economic insecurity. The size of this tax benefit for private equity fund managers is estimated to have been more than $1 trillion over the first twenty years on this century.[8]
IV. Recent Legislative Activity
Over the past 20 years, there has been continuing efforts to both change and defend the tax treatment of carried interest for GPs (the managing partners) of private equity funds.
In response to public outcry over the seeming generosity of this tax treatment, a bill was introduced to Congress in 2007 that would tax fund managers at ordinary income tax rates rather than at capital gains rates. This first effort at changing the tax status of carried interest passed the House of Representatives several times but never secured the 60 votes necessary to make it through the Senate.
From 2010 to 2016, President Obama included a proposal to tax carried interest as ordinary income in each of his budget proposals to Congress. None of these proposals were successful. Similarly, reform legislation was introduced to Congress in 2012 and 2015, to no avail.
In 2017, the Tax Cuts and Jobs Act included a provision that led the IRS and Treasury to revise Section 1061 of the tax code so that the preferential capital gains tax rate would only apply to fund assets held for three years or longer. It is probably safe to say that this new, longer holding period requirement for investment assets has not had a major impact on the tax liabilities of most fund GPs, because most private equity funds already held their investment assets for more than five years.
After the eventual revision of Section 1061 in 2021, another attempt to close the so-called carried interest tax loophole was made in 2022. During budget reconciliation leading up to the signing of the Inflation Reduction Act by President Biden of 2022, attempts were made in legislative rule-writing to eliminate the carried interest tax preference. However, Arizona Senator Kyrsten Sinema was successful, at the last moment, in convincing her fellow Democrats to take such a provision out of the bill. She succeeded in this gambit by threatening to withhold her vote that was necessary for passing the Inflation Reduction Act. This maneuver worked, and with her vote made the bill made its way to the House, after a 51-50 vote in the Senate.[9]
Senator Sinema’s vote was supported by major campaign contributions from private equity executives amounting to hundreds of thousands of dollars during to 2022 election cycle.[10] The National Venture Capital Association, which lobbied vigorously against taxing caried interest at ordinary rates, contributed to Sinema’s political action committee following her vote.[11]
From 2021 to 2024, the Biden administration made several other attempts to tax carried interest as ordinary income, but no proposal weas ever enacted.
In April 2024, yet another attempt was made by the Biden administration to modify the tax treatment of carried interest, amend the tax status of carried interest was introduced to Congress, in the name of the Carried Interest Fairness Act of 2024.[12] This proposed act sought to modify the tax treatment of carried interest, such that, with certain exemptions, carried interest would be taxed as ordinary income. The new title of this familiar legislative proposal is noteworthy.
This legislation had the support of not only President Biden, but also AFL-CIO, American Federation of Government Employees, American Federation of State County and Municipal Employees, American Federation of Teachers, American Postal Workers Union, Americans for Financial Reform, Communications Workers of America, Service Employees International Union, United Auto Workers, and an additional 33 citizen-based, public interest organizations.
Despite this heavy (Democratic) support, the Senate and House versions of this bill – and several others like it proposed by the Biden administration – stalled in congressional committees and was never enacted into law – just like a similarly title bill in 2021.
In 2025, the Republicans’ huge tax-and-policy bill (One Big Beautiful Bill Act) left private equity’s most valuable tax provision alone after a year-long blitz by industry lobbyists in behind-the-scenes negotiations, according to The Wall Street Journal reporting.[13]
In April 2026, Senate Finance Committee Ranking Member Ron Wyden and Senators Sheldon Whitehouse and Angus King took the next step by introducing the Ending the Carried Interest Loophole Act of 2026 that would close the carried interest loophole and ensure that private equity and hedge fund managers paid “their fair share in taxes.”
This new bill has created a new income recognition concept for carried interest holders or fund managers, whereby they would be deemed to receive annual compensation income (taxed ordinary income rates) from the partnership regardless of whether the partnership generated any income or made distributions in the year.
This so-called “deemed income” would replicate an annual return on the portion of the investment capital that the limited partners allocated to carried interest holders (typically 20 percent). This income would be calculated at the rate of return on a five-year high-quality corporate bond (reflecting lower-risk investments) plus another 9 percent (reflecting approximate returns on higher risk investments). This feature would require fund managers to recognize compensation annually, rather than on a deferred basis – a clear plus for the U.S. Treasury.
If and when future capital gains exceed the earlier compensation income, that amount would be taxed at the long-term capital gains rate. But to avoid taxing the same economic income twice, the bill also provides a deemed long-term capital loss equal to the ordinary income recognized each year.[14]
As of the summer of 2026, there had been no action beyond this bill’s introduction: no committee vote, no Senate floor vote, no House companion bill passed. Most tax practioners do not see this bill receiving legislative attention without a significant shift in congressional dynamics. However, it is noteworthy that President Donald Trump’s congressional tax meeting in February 2025 reportedly included a (unanswered) call to end preferential taxation of carried interest.[15]
V. The Substantive Debate
The question of how carried interest should be taxed has been addressed almost continuously by long list of distinguished legal scholars and economists over the past twenty-five years. The central controversy has been differences of opinion about whether carried interest should be considered as capital gains or as compensation for services rendered. The published scholarly work in legal journals and tax notes is extremely granular and fully grounded in the details of both partnership law and the practicalities of the private investment fund industry.[16]
Preserving the Current Tax Regime
Defenders of the current carried interest tax regime argue that carried interest should be taxed as investment returns to fund partners – rather than as pay for service to the fund’s manager (GP) by the fund’s investors (LPs) – because carried interest is the reward that the private equity fund managers receive for developing new ventures and improving existing businesses, and for taking on entrepreneurial risk (even though they often invest relatively little capital). Fund managers also only receive the payout if the fund successfully grows the businesses it acquires. In other words, carried interest should be understood as an equity interest in a partnership whose value depends entirely on the long-term appreciation of the underlying investments – and therefore a true capital gain, not a management service fee.
In addition, supporters of this tax regime argue that, as a public policy matter, such preferential rates encourage the sort of investment and risk-taking that spur economic growth. And, as a business policy matter, supporters point out that the currently taxed version of carried interest and the related profit-sharing arrangement helps to align the incentives of the GP with the profit-making interest of the LPs.
One of the most influential legal scholars representing this view is David. A. Weisbach, now a professor at the University of Chicago Law School. Weisbach argues in a landmark law review article that taxing carried interest as a capital gain should not be considered as a tax loophole, but rather as a long-standing design feature of Subchapter K partnerships laid out in the Internal Revenue Code of 1954. Under the IRC, if an investment fund (such as a buyout or venture capital partnership) earns long-term capital gains, all partners (including the GP as a recipient of carried interest) should receive long-term capital gain treatment as well. This equal treatment arises from the long-standing principle of partnership taxation which is to tax all partners as though they conducted the underlying investment directly.
Weisbach argues that while Congress could certainly change this normal partnership rule, it would create an exception to this principle. He also argues that such a change would be difficult to administer because the tax law would have to answer the question of which partner contributed capital and which partner contributed services and then split the income accordingly, which can be complex and difficult. In elaborating this claim, Weisbach argued that if carried interest were taxed as labor income rather than as a return on capital, tax authority would also have to determine (a) what portion of a partner’s return reflects compensation, (b) what portion reflects entrepreneurial risk, (c) how to value contingent compensation before the investment outcome is known, and (d) how to prevent private investment funds from restructuring transactions to achieve capital gains treatment if the current carried interest tax rule were changed.
Underlying Weisbach’s detailed legal reasoning is his view that carried interest is the reward that the private equity fund managers receive for taking on entrepreneurial risk. He also makes a clear distinction between (a) private equity fund partners who take the risk of investing financial capital and sweat equity in their portfolio companies and (b) investment advisors, such as wealth management professionals, who are arguably “merely agents for the investors and whose fees are therefore taxed as ordinary income.[17] For all these reasons, carried interest should therefore be taxed as capital income.
In addition to Weisbach’s academic work, The American Investment Council, a lobbying group for the private equity business, claims that the current law creates incentives for entrepreneurship, healthy risk-taking, and investment and that a new tax on private capital would be a blow to small businesses which receives three-quarters of private equity investment. The Council also claims that the current tax code supports the “ability of pensions, foundations, and endowments to benefit from high value, long-term investments that create opportunity for millions of Americans.”[18]
Ending the Current Tax Preference
Critics of the current carried interest tax rule argue that carried interest should be taxed at the (higher) ordinary income tax rate, precisely because the GP or fund manager is essentially earning compensation for services rendered, not a return on capital contributed by the fund.[19] Additionally, if carried interest is compensation for management services, it then begs the question of why it is being taxed more lightly than almost any other forms of compensation for allegedly similar services provided by executives of financial services firms or managers of public mutual funds. Generally, economists prefer a tax system where it treats like activities alike – rather than creating distortions by having tax rates, rather markets determine how people decide where to work and how to allocate resources.[20]
Critics also view this preferential tax rate is an unfair loophole that heavily benefits the ultra-wealthy (a possibility that Weisbach acknowledges). For example, early in the debate over the taxing of carried interest, billionaire investor Warren Buffett noted that there is something questionable about a tax system where wealthy fund managers making $500 million can easily end up paying a smaller share of their income in taxes than many middle-income Americans do.[21] Finally, as a public policy matter, opponents ask why the GP of private equity funds need any more incentives than other classes of risk investors to make investments with the potential to spur economic growth and employment.
A leading legal academic expert on this side of the debate is Victor Fleischer, currently a professor at the University of California, Irvine School of Law, who has argued for decades that carried interest is a form of labor compensation for fund managers’ performance and effort and that it should therefore be taxed as ordinary income rather than at the lower long-term capital gains tax rate. In addition to criticizing the carried interest tax regime for taxing labor at capital rates, he characterizes the status quo treatment of carried “as the single most tax-efficient form of compensation available to highly paid executives” without any limits. He advocates reforming this tax “loophole” to restore the “integrity of the progressive tax system” which he argues is severely compromised by the carried interest tax break available to wealthy private equity fund managers.[22]
In his initial proposal to reform the carried interest tax, which was meant to be a compromise between the status quo and taxing all carry as ordinary compensation income, he suggested splitting carried interest into two economically distinct components.
The first component involves the provision of investment services such as finding deals, monitoring portfolio companies, and exiting investments. The second is bearing entrepreneurial risk because the compensation is contingent on performance. Fleischer argued that the second component deserves some favorable treatment, but the first should be taxed as labor income.
The details of this proposal are complex. It was based on the idea that the LPs of an investment fund are essentially allowing the GP or fund manager to invest a much larger amount of capital in the fund than it, in fact, contributes. This implicit agreement is equivalent to the LPs making an interest free loan to the fund manager, and the value of this tacit interest free loan should be taxed as taxable income each year with the appreciation on any direct investment made by the GP in the fund receiving normal capital gain treatment [23]
While this proposal has found its way into various reform proposals submitted to Congress, it has failed to gain traction (by Fleischer’s own admission) due to difficult implementation problems. Fleischer today supports taxing carried interest at the ordinary income rate.
Another proposal to reform the carried interest tax has been offered by Donald Marron, director of the Urban Institute-Brookings Institution Tax Policy Center, who argues that private equity funds should be viewed as businesses, not investors; that it is the funds that “bear the financial costs and risks of putting capital and sweat equity into portfolio companies, with (fund) managers acting as their agents;” that the carried interest fund managers receive should thus be treated as labor income and taxed as such; and to ensure that carried interest is treated appropriately from investor’s perspective, that investors in the fund should be able to deduct carried interest paid as an investment expense against their ordinary income.[24]
Marron argues that treating carried interest as labor income to fund managers and as deductible against ordinary income for investors has multiple benefits, including among others: (a) eliminating preferential tax rates for any capital gains distributed to fund managers that enable wealthy fund managers to pay lower tax rates on their carry than many Americans do on their wages and salaries; (b) eliminating the tax “distortion” that favors carry over management fees or cash awards based on fund performance (as in mutual funds, for example); (c) and providing strong incentives for fund managers to invest more in their funds (now as little as 1 percent) thereby more closely aligning manager incentives with investor returns.
Over the past two decades, Fleischer and Marron have not stood alone as informed opponents of the current carried interest tax. In fact, the list is a long one. Harvard economist Greg Mankiw, former Chair of the Council of Economic Advisers under President George W. Bush, is on this list, arguing that from an economic perspective, carried interest should be taxed the as other compensation for services. [25]
So, too, is MIT’s Simon Johnson, a Nobel laureate in economics who has argued in various interviews, podcasts, policy discussions, and academic papers that many features of the tax law benefit wealthy individuals because of political influence rather than strong economic evidence. He has also repeatedly discussed whether it is desirable for the wealthiest Americans to pay lower average tax rates than many middle-income workers. While Johnson has not explicitly called for a revamp of the carried interest tax, he has for a long time argued for higher taxes on high-income investors and private equity fund managers as part of broader tax reform.[26]
Similarly, Congressional Budget Office (CBO) Director Peter Orszag testified to the Senate Finance Committee in 2007 that “[The tax treatment of carried interest is] important [because]… anytime you have similar activities taxed in different ways, you create distortions… So, when an executive in a financial services firm or a manager of a public mutual fund is taxed in a different way for those services than a general partner in a private equity or a hedge fund, that should be of concern to tax policymakers because of the distortions it can create…”[27] These distortions relate to timing of an investment sale and the gaming of tax rules governing that sale, among others.
From Wall Street, additional statements supporting the recently submitted Ending the Carried Interest Loophole Act of 2026 bill have become public. For example, Morris Pearl, Chair of the Patriotic Millionaires and former managing director at BlackRock, one of the world’s preeminent asset management firms, recently wrote: “The carried interest loophole is the epitome of everything that is wrong with our tax code. There is no reason – policy, political, or otherwise – for billionaire hedge fund managers and private equity executives to get preferential tax treatment on income they earn managing other people’s investments.”[28] Also from Wall Street, Former Goldman Sachs Chairman and Treasury Secretary Robert Rubin concluded at a Brookings conference nearly twenty years ago, “I think at the core there is a very good argument to be made for treating this (carried interest) as ordinary income.”[29]
* * * * *
In light of these opposing and carefully considered positions, many of which have been part of the conversation for 20 years or more, two questions remain unanswered: first, which side of this debate should be the basis for moving forward with respect to the carried interest tax regime (the policy question) and, second, is how to enable a change in the status quo if so desired in light of the consistently well-financed lobbying and campaign financing by influential private equity, real estate, and hedge fund players over the past two decades (the process question)?
The policy question, we have seen, has been variously addressed over past 20 years with little focused attention to matters of justice and fairness (Does the carried interest rule deliver a just reward to the general partners of private equity funds?). To fill this gap, we need to define what qualifies as an indicator of fairness and then apply that normative criterion to the unresolved carried interest case.
The process question requires a dive into the political world of legislative rulemaking and deciding (a) whether the current process, which has successfully been used to block change through two decades of debate, can be deemed fair in light well-accepted democracy values and (b) if not, how applying the principle of fairness can be used to improve chances of changing the carried interest tax rule.
Addressing both questions requires a prior elaboration of fairness as a design criterion for both public policy and the political processes leading to the legislation and implementation of policy.
VI. Fairness Criteria
A useful place to anchor an assessment of carried interest tax policy is a report issued by the Senate’s Joint Economic Committee entitled “Some Underlying Principles of Tax Policy.” This report, now almost 30 years old, offers the following imperative to architects of tax policy: namely, they should work hard “to minimize the economic and social problems that taxation imposes.”
The report elaborates this principle by identifying three criteria that are “universally accepted by experts in public finance” in evaluating whether a tax does, in fact, minimize harm to the members of society. They are (verbatim):
- Not costly for either government or taxpayers to calculate or administer; on the other hand, tax avoidance is difficult and risky.
- Neutral in its impact on resource allocation decisions, minimizing negative effects on economic growth; it does not lead to unproductive economic activity that is tax-induced.
- Fair; people believe that the tax burden is equitably distributed amongst the tax-paying population.[30]
To the third criteria defining whether members of society have been harmed by a given, we need to add another dimension of fairness: procedural justice, which means giving ordinary citizens meaningful access and voice in the decision-making or legislative process. If the setting of tax policy – or any other public policy – is captured by interest groups in ways that crowd out the access and voice of the “loyal” opposition, then that deprives those opponents of their Constitutional (14th Amendment) rights.[31]
While not depreciating the importance of the first two criteria related to cost and allocative efficiency and productive economic activity, the fairest criterion deserves special comment. This is because fairness is generally thought to be a core pillar of democracy, and the private equity industry resides in and receives many benefits from being embedded in a functioning democracy.
For example, public perceptions of fairness in a democracy like the U.S. tend to fall into two general categories: the fairness of political processes leading to the government’s enactment of public policy and the fairness of the policy or government output itself. When both aspects meet community standards, democratic governments can rule by consent rather than by coercion. In the absence of such perceived fairness, it is virtually impossible to build public trust in representative government. It is also difficult to keep the peace if the laws do not treat citizens fairly. So, the stakes for “keeping things fair” are very high.
In a democracy, fairness in political process and government output can usefully be thought to include the following attributes:
- Equal Voice – where every citizen gets a clear and equal say in choices
- Equal Rules – where laws protect everyone in the same way with no special favors
- Equal Access – where all people have an equal access to government and the political process
- Shared Power – where leaders and governing institutions answer to the people and face legal accountability if they do not.[32]
When these conditions of political equality are met, not only can a society be deemed functionally democratic, but also one that will likely be perceived as being fair by its citizenry. In such an idealized democracy, every citizen’s wants and needs receive equal consideration in collective decision-making, and for this to happen the game of politics must be played on a level playing field characterized by equal voice, equal rules, equal access for all, and in the end some form of power sharing.[33]
Beyond these indicators of political equality, fairness in political life is also a matter of ensuring the fairness of government output – which poses knotty problems of measuring the quality of output and adjusting for various conceptions of the common good.[34] To paraphrase American philosopher Michael Sandal, fairness is not only about political equality (equal voice, equal rules, equal access, and shared power) but also about the right way of measuring it relative to some ideal standard.[35] This is a great and important challenge, inescapabilty requiring judgement.
While there will always be differing views of what constitutes a fair policy output (for example, does a progressive tax voted by Congress treat citizens more fairly than a flat tax?) as well a fair political process (given that lobbying or representing one’s interests to Congress is protected by the Constitution), it should be clear that any gross violations of fairness of the political process leading to government output will directly affect the perceived fairness of that output.[36]
With this barebones framework for thinking about what fairness means in a democratic system of economic and political governance, we can begin to address the central questions of whether government output (in this case, the current caried interest tax policy) is “fair” and whether the political process leading to its successful protections in the past and its potential reform today can be deemed “fair.”
With respect to the fairness of government output, the principal fairness issues concerning the carried interest tax rule include:
- Tax Burden Equity: Does the carried interest tax preference promote or detract from an equitable distribution of tax burden?
- Balance of Public Benefits & Private Gains: Is the short-term federal revenue tax loss created by the carried interest tax preference balanced in a meaningful way by new economic growth?
With respect to political process, the principal fairness issue is:
- Procedural Justice: Does the process of writing and legislating tax rules respect such foundational democratic values as equal voice, equal rules, and equal access for all citizens?
Each of these rules suggests, of course, their own standards. For the reader, the question is does the application of these fairness standards support the case for reforming the current carried interest tax rule in some way.
Applying Fairness Standards to the Carried Interest Tax Regime
Tax Burden Equity.
There are two principal reasons why the current carried interest tax rule falls short of the tax burden equity standard of fairness. In the first instance, by designating carried interest as a capital gain for fund managers (the GP) rather than professional service fees, fund managers receive a significant discount on their tax obligation. Since carried interest neither reflects nor flows from a gain on invested capital, this tax discount is conceptually equivalent to a direct subsidy paid by the federal government to private equity fund managers for work claimed by the CBO and others to be roughly equivalent to that of other highly incentivized managers of non-private investment funds, such as portfolio managers of actively managed mutual funds who receive no such a tax subsidy.
Under conditions where neither type of investment manager makes major capital investments in their funds, one would think that the compensation of each group of managers should be taxed identically at the ordinary income tax rate. If apart from their managerial roles, private and public fund managers do invest capital like other investors in their funds and realize long-term capital gains, they would of course be taxed at the capital gains tax rate.
In addition to the absence of capital investment by both groups of fund managers (in the scenario presented here), their work product is also quite similar with respect to locating and acquiring attractive investments, overseeing their performance, and executing well-timed exits. The most distinctive difference is that the private equity fund managers are involved in a more complicated asset acquisition process involving detailed negotiations over value, post-acquisition financial structure, and continuing board oversight of portfolio companies. But these activities are services provided by the fund’s GP, not investment risks taken on by the fund’s LPs. For these reasons, the special tax preference or tax break given to private equity fund managers is difficult to justify based on a comparison of work product and personal financial risk with that of public fund managers.[37] For similar reasons, the perpetuation of the favored carried interest tax treatment is a continuing source of tax burden inequity.
The second failure to meet the tax burden equity standard of fairness is that the carried interest tax rule is unfair to those less wealthy citizens who dutifully pay their full share of taxes on earned income – which raises the rhetorical question of why would compliant taxpayers paying their statutory amounts not feel that they are carrying an unnecessary burden because a wealthy minority are not paying what they owe on their earned income? The fact of the matter is that polling shows many compliant taxpayers feeling cheated and unnecessarily abused by the tax system (as billionaire Warren Buffett suggests), and a case can be made that this kind of citizen distress is reflected in successive polls over the past two decades showing declining trust and confidence in U.S.-style capitalism.[38]
Balance of Public Benefits & Private Gains.
This fairness standard requires a more detailed explanation because we need to distinguish between the capital gain tax rule applied under normal investment conditions and its specific application to the carried interest earned by the managers of private equity funds. The two situations are quite different with respect to the public benefits and private gains of this tax preference.
To start, supporters of the capital gains tax treatment for carried interest often root their position in the argument that the tax treatment of carried interest, like that of all capital gains, has led to a level of capital formation, new investment, technological innovation, and economic expansion beyond that otherwise possible.
But after years of enquiry and systematic academic research, however, it appears that that the magnitude of the claimed economic and social benefits flowing from the capital gains tax rule in general remains unclear (and perhaps overstated). As a result, this puts the government in the suspect position of depriving the public purse of tax revenues that could have been spent on public needs. From the perspective of ordinary citizens, it is easy to imagine that this looks like yet another government subsidy that disproportionally benefits wealthy investors, contributes to systemic inequality, and is associated with little or no public benefits.
How did we get to this place? A good guess is that it starts with the logical argument that the corporate tax rate (not the capital gains tax rate), along with an increase or decrease in that rate, affects capital formation, investment, and economic growth by lowering or raising investors’ overall cost of capital and increasing or decreasing their potential rate of return. If this financial logic holds, which it generally does, then it is easy to assume that the trade-off of a lower tax rate and lower tax return to the Treasury for higher economic growth benefitting society at large is a fair and appropriate trade-off.
This assumption is supported by a variety of statistical studies of changes in the corporate tax rate showing historical surges in revenue growth (and investment necessary to generate such revenue growth) after cuts in the corporate tax rate. According to the Tax Foundation – a market-oriented, non-partisan think tank – the overwhelming evidence from these studies, reported in 2012, supports the proposition that the higher the corporate tax rate, the less capital can be mobilized and invested, and the lower the corporate rate the more capital can be created and employed.[39]
But even the massive review by the Tax Foundation and its seeming rock-solid conclusions are not without conditions offered by other tax experts. Economic studies pursuant to the Tax Foundation Special Report have attempted to unpack the sometimes-fuzzy relationships between the lower tax rates and economic activity. Their findings vary markedly according to methodologies used, alternate assumptions made, how the disruption of the 2008 financial panic was handled, the proper specification of complex tax terms, and the composition of control groups.
For example, casting doubt on the more general relationship between capital gains taxes and economic growth articulated by the Tax Foundation, Leonard Burman, former director of the Urban-Brookings Tax Policy Center, argued in a report issued in 2012 that “capital gains tax cuts are as likely to depress the economy as to stimulate it.”[40] And then a decade later in 2024, the Tax Foundation itself reported new evidence that while investment tax credits for R&D can positively affect innovation, this relationship is not always clear and that a lower marginal corporate tax rate might be even better at fostering innovation.[41]
Other research has also painted a more ambiguous picture, concluding that the investments effects of lower corporate tax rates are usually smaller than advocates sometimes claim. For example, the Library of Congress released in April 2025 a detailed review of seven cause-and-effect studies of the economic effects of the 2017 tax cuts, known as U.S. Tax Cuts and Jobs Act. Each of these studies were highly technical exercises, and their results varied widely. However, one of the important conclusions of the Library of Congress review was that reducing taxes on corporations and some pass-through businesses produced much smaller investment increases than many prior forecasts had predicted – although targeted investment tax credits, like renewable energy tax credits, appear to work better by reducing the marginal cost of specific investments. [42]
Finally, none of the research noted here eliminates the lack of clarity about what share of corporate tax savings from a reduced corporate tax goes, in actuality, toward new investment and new jobs versus share repurchases, dividends, debt reduction, or cash accumulation.[43]
Even if we discount the ambiguities surrounding the Tax Foundation’s principal findings pertaining to the revenue (and investment) effects of reducing or increasing the corporate tax rate, they reveal very little about the capital formation and economic growth effects of the capital gains tax on carried interest earned by private equity fund managers. This is a more controversial subject than the effects of changes in the overall corporate tax rate, and active debate continues today about the short-run and longer-run effect of the capital gains tax on, for example, the venture capital business.[44]
In 1989, MIT professor James Poterba argued (in part) that capital gains taxation affects venture capital activity primarily through its effect on entrepreneurial incentives to start firms, rather than through investors willingness to supply venture capital.[45] If this is so, then the relationship between the favorable capital gains tax rate for private equity fund managers and new capital formation may be more indirect than some advocates for the current tax regime believe.
Consider also President Bill Clinton’s reduction of the top capital gains tax rate from 28% to 20% in the Taxpayer Relief Act of 1997. Although venture capital investment activity expanded in its wake, it has been hard to prove that the tax cut itself caused a large increase in net new capital formation because the late 1990s also had a lot of other things going on such as the internet/technology boom, fall interest rates, a booming stock market, strong productivity growth, national budget surpluses, and increasing capital flows to the U.S.[46]
In 2006, scholars were still questioning the impact of the capital gains tax on capital formation in the world of venture capital.[47] For example, Jane Gravelle of Tax Notes Research then wrote, “Although arguments are made that lower gains taxes stimulate innovation and entrepreneurship, there is little evidence in history to connect periods of technical advance with lower taxes or even high rates of return. The extent to which entrepreneurs take tax considerations into account is unclear; however, there is some reason to doubt that capital gains taxes are important in obtaining large amounts of venture capital, in part because much of this capital is supplied by those not subject to the capital gains tax (i.e., pension funds, foreign investors).”[48]
For all these reasons, it is difficult to accurately claim that (a) true additional capital formation due to the existence of the carried interest tax regime has taken place and (b) the Treasury’s shortfall in tax revenue has been a productive investment on behalf of ordinary taxpayers.
Serious doubts about the economic efficacy and fairness of the carried interest tax rule remain: would the start-up revolution in the biosciences, artificial intelligence, energy, and even automotive manufacturing would have slowed or ceased in the absence of the carried interest tax break; would businesses other than private investment funds have increased their R&D investments or rate of innovation, for example, if they enjoyed the same tax breaks as the managers of private investment funds; and so on. These doubts have been echoed, we have seen, by credible players in both government and the business community – and for good reasons.
Ultimately, the key unanswered question is: has the shortfall of tax revenues to the treasury and the corresponding windfall of tax advantaged income to private equity fund managers under the carried interest tax regime led to a fair economic exchange of value for the nation? Or, in the language of the relevant fairness standard, has the short-term federal revenue tax loss created by the carried interest tax preference been balanced in a meaningful way by new economic growth?
The positive case is, at best, an ambiguous one – and a natural cause of alarm for ordinary tax-paying citizens. In the absence of clarity about the fairness and true benefits of the carried interest tax break, it is perhaps inevitable that the investment fund industry has found it necessity to invest heavily in campaign finance contributions and Congressional lobbying to keep the status quo in place.
Procedural Justice.
While the accumulation of wealth achieved through entrepreneurship and innovation sponsored by the private equity industry is certainly to be welcomed, such accomplishment becomes politically and ethically tainted if undemocratic influence and procedural injustice play a large role in its creation. This possibility is the subject of the third fairness criterion: namely, whether the process of writing and legislating tax rules respects such foundational democratic values as equal voice, equal rules, and equal access for all citizens.
In the case of the carried interest tax regime, the accumulation of great wealth for the general partners of successful private equity firms has been aided not only by the legal briefs of the regime’s defenders, but also by large financial contributions to election and lobbying campaigns made by a small group of wealthy individuals, companies, and industry groups seeking to preserve a federal tax rule that is extremely favorable to their private interests. To the extent that this money crowds out the voice of other interested parties, confers privileged access to public decision-makers and rule-makers, or involves exchanging implicit quid-pro-quos with policymakers, this influence process takes on a whiff of cronyism.
Where cronyism exists (and it is, unfortunately, quite pervasive in the U.S. today), the goal of business players is to expand their slice of the economic pie by pursuing such privileged advantages like tax breaks, targeted exemptions from legislation, advantageous rules by regulatory agencies, direct subsidies, preferential tariffs, preferred access to credit, and protections from prosecution.[49]
The private equity industry is no different from other U.S. industries in this respect – in lobbying very heavily for the preservation of current tax rule. For example, according to Bloomberg, the private equity firm Blackstone Group alone spent $5 million as far back as 2011 lobbying Congress on issues that included the tax treatment of carried interest. Other private equity players spent from $80,000 to $150,000 in just the fourth quarter of that year.[50]
From its founding in April 2007 through October 2025, the American Investment Council (AIC) – the primary and most powerful lobbying arm for the private equity industry – dispensed $60 million in lobbying expenditures, primarily defending against the Carried Interest Fairness Act of 2024, which aimed at closing the carried interest tax preference.[51] In recent years, AIC spent $3,100,000 in 2023 and $2,670,000 in 2024 on total Congressional lobbying activities, according to the Federal Election Commission and Open Secrets. In 2024, AIC also contributed $898,795 to the political campaigns of individual candidates.
In addition to the lobbying and campaign contribution dollars supplied by the AIC and individual firms like Blackstone, the personal contributions of high-profile private equity fund managers to political campaigns have far exceeded those of its leading trade group. For example, in 2024 election cycle Blackstone’s Stephen Schwartzman contributed $40,020,039 to federal candidates, political parties, and outside groups; for Citadel’s Kenneth Griffin contributed $108,402,284 to federal political groups; and Andreessen Horowitz’s Marc Andreessen contributed $42,365,133 for in overall federal contributions – according to Open Secrets.[52]
While clearly not limited to preserving the carried interest tax regime, these dollar amounts vastly outnumber the lobbying dollars that the supporters of carried interest reform could ever imagine matching. But equally as important as the absolute and relative amount of lobbying and campaign finance dollars is the quality of the lobbyists that the investment industry hired to lobby for their interests. According to Bloomberg News, Blackstone’s top lobbyists fifteen years ago included Wayne Berman, a former assistant commerce secretary under President George H.W. Bush; Drew Malony, a staffer for former House Majority Whip Tom Delay; and Moses Mercado, the former House Democratic Leader Richard Gebhardt’s deputy chief of staff.
Kohlberg, Kravis Roberts (KKR) hired former Representative Vic Fazio, Democrat from California. And Bain Capital hired Joseph O’Neil, chief of staff to former Senate Finance Committee Chairman Lloyd Bentsen, and Paul Snyder, a former legislative assistant to former House Speaker, Tip O’Neil, Democrat from Massachusetts. While the voting of carried interested tax reform has tended to split along party lines, this is not so with the hiring of experienced lobbyists.[53]
What all this activity shows is that this industry can and has mobilized unmatchable resources to protect its interests, and opposing voices have been inevitably diminished or crowded out. As a result, reform of the carried interest rule has been successfully blocked. Because of such a rich combination of effective lobbying and campaign contributions, the current carried interest rules – whether intended or not – continue to favor high net-worth investment fund managers over ordinary wage earners who pay taxes at a substantially higher rate, and opportunities for the partners of private equity firms to become extremely wealthy at a preferential tax rate remain in place.
It is certainly possible that the aura of this successful legislative onslaught and its whiff of cronyism help explain why, today, polling by the Pew Research Center shows that Americans put money in politics as our top national problem, ranking it above immigration, inflation, and even healthcare.[54] A similarly timed survey by Wall Street Journal-NORC in June 2026 is consistent with the Pew polling: Only 12 percent said that democracy is working very well or extremely well, and a mere 16 percent said average citizens have considerable influence on politics. When asked about their views on capitalism, some 51 percent said it wasn’t working well or working at all – up from 37 percent in 2015.
So, has the process of writing and legislating tax rules respected such foundational democratic values as equal voice, equal rules, and equal access for all citizens? Again, this is a very difficult case for supporters of the current carried interest tax regime to make convincingly.
VII. Conclusion: Why Worry? What now?
This review suggests that the case for repeal of the status quo embodied in the Ending the Carried Interest Loophole Act of 2026 is a solid one when the current tax arrangement is viewed through the lens of (a) ordinary tax-paying citizens, (b) commonly accepted principles of political equality, and (c) the no-harm tax principles offered by the U.S. Congress Joint Economic Committee issued twenty-eight years ago. When applying all these fairness criteria to the current carried interest tax rule, the rule looks more like a veiled subsidy to private equity fund managers than a just reward.
In addition to substantive content of the tax rule itself, this review also shows how the political process protecting the carried interest tax rule in the past can also be deemed unfair according to explicit standards.
Congressional attention to resolving the carried interest controversy is important not only as a matter of immediate corrective justice but also as a clear signal that policing and reinforcing tax discipline throughout our economy is a continuing priority for our democracy.
The carried interest tax preference has been contributing to the nation’s wealth inequality for decades, and the societal risks of increasing wealth (and power) disparities between the elites and regular citizens are high. The principle risk is that the essential premise of our democratic republic – that all citizens must work together in making our democratic experiment work – will down as our wealthiest citizens defect from supporting the country that has made them wealthy in the first place.
It is no secret that many citizens and candidates for public office have become increasingly cynical about equal treatment when it comes to tax obligations – starting with the claim that very wealthy and influential members of society are in a position to game ordinary income taxes by hiring highly skilled lawyers and accountants to help them reduce their annual tax payments. This practice, critics observe, can not only be extremely demotivating for democracy-supporting citizens but also a significant contributor to our national “tax gap” as well.
In public finance, the tax gap refers the federal revenue loss stemming from the non-payment of legally owed taxes – or more technically, from the difference between estimated “true” tax liability for a given period and the amount of tax that is paid on time.[55] The tax gap is a leading indicator of the underreporting, underpayments, and non-filing of taxes.
Not surprisingly, the proportion of unpaid taxes is not equitably distributed among taxpayers. While most taxpayers are fully compliant with tax obligations, because their payments are automatically withheld or are clearly reported, “taxpayers with more complex sources of income, most of whom are in high- income brackets, are responsible for the vast majority of unpaid taxes.”[56] Indeed, according to Tax Notes, the top 1 percent of earners are responsible for at least 30 percent of the tax gap.[57] As of 2019, the total amount of all unpaid taxes on legally due taxes (stemming from both contested taxes from individuals and corporations with complicated tax filings and outright fraud) totaled almost $600 billion annually – a “tax gap” greater than all income tax paid by 90 percent of individual taxpayers.[58]
In this context, special care needs to be paid by all intentionally tax-compliant individuals and businesses. At a time when income and wealth inequality is increasing along with economic insecurity, and when more citizens are questioning whether the system works for them, it is important as a political matter to restore and maintain public confidence in our economic institutions. This confidence and trust rests heavily on the public’s perceptions of fairness, which is one of the reasons that the carried interest controversy is such an instructive case to bring to light.
As a symbol of the kind of economic and political influence that can be mobilized to capture legislative rulemaking and at the same time weakens community confidence and trust in our political economy, it is time for the little-known but highly controversial carried interest tax loophole to be closed. What’s at stake is no less than the credibility and perpetuity of U.S.-style democratic capitalism. The politics of allowing the wealthiest Americans to pay much less than community’s sense of fair share is not sustainable.
* * * * *
Is it naïve to expect that Congress will pay attention to the carried interest problem, let alone work to eliminate it or mitigate its adverse effects? The pressure (in the form of campaign contributions and lobbying) from extremely wealthy private equity leaders and industry associations on members of Congress to preserve their favorable tax treatment is palpable.
The answer is, “Maybe not.” May not, if the intent of the pending Ending the Carried Interest Loophole Act of 2026 is framed and publicized effectively. Such a framing requires identifying this proposed legislation not as a narrow, industry-specific reform but rather as a wake-up call to the many tax-related preferences and loopholes that threaten the continuance of what Martin Wolf of The Financial Times refers to as the fragile marriage of democracy and capitalism.[59]
* James J. Hill Professor Emeritus, Harvard Business School and author of The Fading Light of Democratic Capitalism: How Pervasive Cronyism and Restricted Suffrage Are Destroying Democratic Capitalism as a National Ideal … And What to Do About It (Cambridge University Press, 2024).
1The American Investment Council report prepared by Ernst & Young, Economic Contribution of the U.S. Private Equity Sector in 2024 (March 2025).(go back)
2The term “carried interest” harkens back to seafaring days when ship captains shared in the gains from selling cargo they carried for merchants to far away ports. Carried interest provided a strong incentive for those captains to earn handsome profits for merchants financing their voyages.(go back)
3Limited partners typically include pension funds, insurance companies, endowments, or wealthy individuals.(go back)
4The GP also receive a management fee amounting to 2% of fund assets to cover such day-to-day operational costs of the fund as payroll, office space, technology, travel, and legal/due diligence costs.(go back)
5To the extent that the GP also owns equity in its own fund, it also pays the normal capital gains tax rate on any profits generated, just like any other LP who contributes most of the fund’s capital.(go back)
6Jonathan Goldstein and John Rubinetti, “2021 North American Private Equity Investment Professional Compensation Survey: Insights: Heidrick & Struggles,” 2021 available at https://www.heidrick.com/-/media/heidrickcom/publications-and-reports/2024-north-american-pe-operating-professional-compensation-survey.pdf?rev=79105df2af5e44febf35ecdd69a7c33a&hash=4BC5940151F35952AE59AFEA330C421B. See also, The Second Estate: How the Tax Code Made an American Aristocracy (The University of Chicago Press. 2025), p. 33 for 2019 survey results. In addition to salary, bonus, and carried, private equity firm partners and may also be awarded co-investment rights, direct equity participations, and warrants and options.(go back)
7The Budget Lab, “Refining Revenue Estimates for Taxing Carried Interest,” May 4, 2026. Available at https://budgetlab.yale.edu/research/refining-revenue-estimates-taxing-carried-interest. See also Michael Love, “Who benefits from partnership flexibility?” Journal of Public Economics, Volume 251, November 2025. Available at https://www.sciencedirect.com/science/article/abs/pii/S0047272725001914?via%3Dihub. This estimate was also a marked increase over a previous estimate of the revenue shortfall related to the carried interest tax preference by the Congressional Budget Office of approximately $13 billion over the 10-year period 2025-2034. See https://www.cbo.gov/budget-options/60946.(go back)
8Phalippou, Ludovic, “The Trillion-Dollar Bonus of Private Capital Fund Managers” (June 12, 2024). Available at SSRN: https://ssrn.com/abstract=4860083 or http://dx.doi.org/10.2139/ssrn.4860083. This estimate of the aggregate carried interest earned over this 20-year period is based on a study of partner compensation in a sample of 12,137 private investment funds. The $1 trillion estimate accounted for 18 percent of all investors’ profits. Over this 20–30-year period, private equity has on average delivered only a modest net performance (after fees, etc.) over that of public equities, but there seems to be agreement that manager selection (of the funds) is the greatest determinant of a fund’s relative success and that there is a greater dispersion of private equity manager returns than is the case with managers of mutual funds. The top-quartile managers have produced exceptional returns, and investors with access to elite managers have historically fared well financially; but average investors without privileged access to the best private equity funds have not been so fortunate. Measuring precise comparative returns is difficult to determine due to differences of opinion about what the most accurate and relevant performance benchmarks are (mutual funds, small-cap stocks, leveraged companies, illiquid businesses?). For a superb review of recent research on the performance of private equity funds, see Robin Wigglesworth, “Is Private Equity Actually Worth It?” Financial Times, March 5, 2024.(go back)
9Over the past twenty years there have been a succession of bills introduced to both the House and the Senate, which have not received sufficient Congressional support to pass into law.(go back)
10According to one report, Senator Sinema’s political campaigns received funding of over $3 million from investment groups, of which the largest donor was the Blackstone, the world’s largest alternative asset manager whose corporate private equity assets under management totalled $174 billion as of Jube 30, 2026 and included 104 portfolio companies. See https://www.blackstone.com/our-businesses/private-equity/.(go back)
11See www.opensecrets.org › members-of-congress › summary › cycle=2022.(go back)
12This bill was cosponsored by 15 Democratic senators: Senators Baldwin, Manchin, Brown, Whitehouse, Van Hollen, Markey, Warren, Klobuchar, Sanders, Reed, Kaine, Welch, Booker, Hirono, and Schatz.(go back)
13Chris Cummings and Rod James, “How Private Equity Avoided Major Tax Hits From Trump’s Big Bill,” The Wall Street Journal, July 11, 2025.(go back)
14See “Carried interest reform return to Congress: Ending the Carried Interest Loophole Act,” DLA Piper Insight, May 28, 2026. Available at https://www.dlapiper.com/en-us/insights/publications/2026/05/carried-interest-reform-returns-to-congress.(go back)
15Ibid.(go back)
16For an excellent overview of the carried interest controversy, the flow of money and services in private investment funds, and the variety of technical tax considerations, embedded legacy loopholes, and related accommodations and proposals involved in this controversy, see Donald B. Marron, Jr., “Goldilocks Meets Private Equity: Taxing Carried Interest Just Right,” at Urban Institute-Brookings Institution Tax Policy Institute, October 6, 2016.(go back)
17David A. Weisbach, “The Taxation of Carried Interest in Private Equity,” Virginia Law Review, Vol. 94:715, 2008. Weisbach’s research for this article was originally funded by the Private Equity Council.(go back)
18Alan Rappaport and Emily Flitter, “Carried Interest Is Back in the Headlines. What Would a New Tax Proposal DO?” New York Times, July 28, 2022. Available at https://www.nytimes.com/2022/07/28/business/carried-interest-loophole-tax-proposal.html.(go back)
19Of course, if GPs co-invest in their fund, then their gains on that investment would be taxed as a capital gain.(go back)
20Discussed in Aviva Aron-Dine, An Analysis of the “Carried Interest” Controversy, Center on Budget and Policy Priorities, August 1, 2007, p. 2. Available at https://www.cbpp.org/research/an-analysis-of-the-carried-interest-controversy.(go back)
21Tom Bawden, “Warren Buffett Says Rich Should Pay More Taxes,” London Times, June 27, 2007. Also referenced in Aviva Aron-Dine, op. cit., p. 3.(go back)
22Victor Fleischer, “Two and Twenty: Taxing Partnership Profits in Private Equity Funds,” New York University Law Review, 2008, U of Colorado Law Legal Studies Research Paper No. 06-27, UCLA School of Law, Law-Econ Research Paper No. 06-11, Available at SSRN: https://ssrn.com/abstract=892440.(go back)
23Victor Fleischer, “Carried Interest Update,” September 13, 2021. Available at https://vicfleischer.substack.com/p/carried-interest-update.(go back)
24Marron, Op. Cit., p. .6(go back)
25Mankiw has commented, “Deferred compensation, even risky compensation, is still compensation, and it should be taxed as such. “The Taxation of Carried Interest,” http://gregmankiw.blogspot.com/2007/07/taxation-of-carried-interest.html.(go back)
26See, for example, “Power and Consequences: Why Don’t the Wealthy Pay More Taxes? Power and Consequences,” Podcast April 20, 2026, MIT Stone Center.(go back)
27Transcript of Senate Finance Committee Hearing, “Carried Interest: Part I,” July 11, 2007, obtained through Federal News Service.(go back)
28Both quotes are included in an April 16, 2026 news release of U.S. Senate Committee on Finance. Available at https://www.finance.senate.gov/ranking-members-news/wyden-whitehouse-king-lead-introduction-of-bill-closing-carried-interest-tax-loophole.(go back)
29Transcript, Hamilton Project Event, “Reforming Taxation in the Global Age,” Panel 2, June 12, 2007. http://www3.brookings.edu/comm/events/20070612p2.pdf.(go back)
30Richard K. Vedder and Lowell E. Gallaway, “Some Underlying Principles of Tax Policy,” Prepared for the Joint Economic Committee, September 1998, p. 4. Available at https://www.jec.senate.gov/public/_cache/files/66e9efb6-d4e5-4acd-90c2-38824afb4b32/some-underlying-principles-of-tax-policy—sept-1998.pdf. The report adds that there is less than universal agreement on a fourth criteria related to the principle of representative democracy: namely, that a good tax is one that is transparent; and that people are aware of its existence and know the burden that it imposes.(go back)
31“An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950). Quoted in “Procedural Due Process Civil,” Justia U.S. Law available at https://law.justia.com/constitution/us/amendment-14/05-procedural-due-process-civil.html#fn-754(go back)
32Sidney Verba, “Fairness, Equality, and Democracy: Three Big Words,” Social Research: An International Quarterly of Social Sciences, 2006, 73(2), pp. 504ff.(go back)
33Ibid.(go back)
34Ronald Dworkin, Sovereign Virtue: The Theory and Practice of Equality (Cambridge (Harvard University Press, 2000), p. 185 ff.(go back)
35Michael J. Sandal, Justice (Farrar, Straus and Giroux, 2009), p. 261(go back)
36Verba, op. cit., p. 520.(go back)
37As another significant point of comparison, the tax-advantaged incentive pay (carried interest) for private investment fund managers contrasts with that normally structured for corporate executives in the form of non-qualified stock options (most common for executives), which are taxed at the higher ordinary income tax level.(go back)
38A recent Wall Street Journal-National Opinion Research Center poll shows that just under half of Americans say capitalism is working very well or even somewhat well for them, down from 60 percent a decade ago. Confidence in the nation’s system of government is even lower, with only 12 percent reporting that democracy is working very well or extremely well, and only 16 percent reporting that average citizens have considerable influence in politics. See Aaron Zitner, “America’s Support for Capitalism Has Declined Over Last Decade,” The Wall Street Journal, July 8, 2026. Available at https://www.wsj.com/politics/policy/wsj-poll-usa250-capitalism-democracy-940af905.(go back)
39More specifically, the Tax Foundation reviewed of twenty-six academic studies between 1983 and 2012 and found that twenty-three of the twenty-six studies reviewed found that taxes and tax increases generally had a negative effect on corporate revenue growth, with the strong implications that tax decreases have a positive effect on economic growth. See William Mc Bride, “What Is the Evidence on Taxes and Growth?” Tax Foundation Special Report, December 18, 2012. p.2. Available at https://files.taxfoundation.org/legacy/docs/sr207.pdf and Stephen J. Entin, “Disentangling Center for American Progress Arguments against Tax Cuts for Capital Formation: Part 2,” Tax Foundation, November 17, 2015. Available at https://taxfoundation.org/blog/disentangling-cap-arguments-against-tax-cuts-capital-formation-part-2/. Readers should note that critics of lower capital gains taxes express concerns about the adverse budget effects, the benefit that such a tax confers to higher income individuals, and its encouragement of using the capital gains tax differential with the ordinary income tax as a basis for developing arcane tax sheltering activities that would add complexity to an already complex tax regime.(go back)
40Due, for example, that taxing capital gains at a lower rate than other income creates incentives to invest in inefficient tax shelters and other economic distortions or that taxing capital gains on realization discourages sales of assets: the so-called “lock-in effect.” See Leonard E. Burman, “Capital Gains Tax Rates and Economic Growth, or Not,” TaxVox, Urban-Brookings Tax Policy Center, March 15, 2012 and testimony before House Committee on Ways and Means and the Senate Committee on Finance, September 20, 2012 at https://www.finance.senate.gov/imo/media/doc/092012%20Burman%20Testimony.pdf.(go back)
41Trey Price, “Do R&D Tax Credits Encourage Innovation?” at https://www.theamericanconsumer.org/2024/01/do-rd-tax-credits-encourage-innovation/.(go back)
42See https://www.congress.gov/crs-product/R48485?__cf_chl_f_tk=.StcanrgV3BfFxT16quqMkCubwlFVjV7j57ujd2tFGc-1783446077-1.0.1.1-NEYTdBf2egEKX5HSC1_7Frm1JlxArN_typzgwSvz_Oo(go back)
43Charles O. Rossotti, “Recover $1.6 Trillion, Modernize Tax Compliance and Assistance,” Tax Notes Federal, Mar. 2, 2020, p. 1411. Rossotti is a former commissioner of Internal Revenue under both Democratic and Republican administrations.(go back)
44For a survey of this literature, see Jane G. Gravelle, The Economic Effects of Taxing Capital Income, MIT Press, 1984, pp. 143- 151.(go back)
45James Poterba, “Venture Capital and Capital gains Taxation,” Tax Policy and the Economy, Volume 3, 1989.(go back)
46As we would expect, however, capital gains realizations rose sharply as investors were able to sell appreciated stock assets profitably at a lower tax rate. In economics-speak, the “lock in” effect was reduced by unlocking previously frozen capital and enabling investors to redeploy funds. As a result, stock prices and overall market valuations jumped immediately.(go back)
47As an historical note, the capital gains tax was first introduced in 1913 and has gone through innumerable rates, exclusions, qualified asset holding periods, and political quarrels and legislative initiatives since then.(go back)
48Jane G. Gravelle, “CRS Report Reviews Pros and Cons of Capital Gains Tax Cuts,” Congressional Research Service, Tax Notes, January 13, 2006. Available at https://www.taxnotes.com/research/federal/legislative-documents/congressional-research-service-reports/crs-report-reviews-pros-and-cons-of-capital-gains-tax/xxy6. See CRS Report RL30040, Capital Gains Taxes: Innovation and Growth, for a further discussion of capital gains taxes and venture capital.(go back)
49For a more detailed definition and discussion of cronyism in today’s political economy, see Malcolm S. Salter, The Fading Light of Democratic Capitalism (Cambridge University Press, 2024).(go back)
50Sloane, Steven, “Private-Equity Lobbying Helped Protect Romney’s Tax Benefits,” Bloomberg News, February 7, 2012 available at http://www.bloomberg.com/news/2012-02-07/private-equity-lobbying-protected-romney-s-tax-benefit-of-carried-interest.html.(go back)
51See Legis 1 Editorial, October 23, 2035 at https://legis1.com/news/private-equity-lobbying-spending.(go back)
52https://www.opensecrets.org/elections-overview/biggest-donors(go back)
53Sloan, op. cit. According to Open Secrets, there are 11,500 registered lobbyists in 2026, and the finance industry (defined broadly) accounts for over 2,000 of them.(go back)
54See americanpromise.net/pewmay2026(go back)
55“The Tax Gap,” IRS available at https://www.irs.gov/newsroom/the-tax-gap.(go back)
56Charles O. Rossotti, Natasha Sarin, and Lawrence H. Summers, “Shrinking the Tax Gap: A Comprehensive Approach,” Tax Notes Federal, Volume 169, November 30, 2020, p. 1467.(go back)
57Jason DeBacker et al., “Tax Noncompliance and Measures of Income Inequality,” Tax Notes Federal, Feb. 17, 2020, p. 1103.(go back)
58Charles O. Rossotti and Fred L. Forman, Tax Notes Federal, September 14, 2020. See also, Charles O. Rossotti, “Recover $1.6 Trillion, Modernize Tax Compliance and Assistance,” Tax Notes Federal, Mar. 2, 2020, p. 1411.(go back)
59Martin Wolf, The Crisis of Democratic Capitalism (Penguin Press, 2023), p.13ff.(go back)
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