Commentary
A government spending deal formulated by Senate Democrats could finally lead to increasing the tax rate on so-called carried interest income.
It’s a capital gains tax applied to an arcane concept—irrelevant to 99 percent of taxpayers—that has been debated in the halls of Congress for more than a decade. Taxing carried interest at the lower capital gains rate has few backers in Washington, yet it has proven hard to kill. Both President Obama and President Trump promised to increase carried interest tax, but neither presidents were able to execute on that goal.
What is carried interest? It is the profits private equity, venture capital, and hedge fund investment managers earn from their investments, after certain performance thresholds have been reached (e.g., a preferred return). Most carried interest is structured as 20 percent after a certain hurdle has been reached by investors (usually 8–10 percent return). In other words, carried interest is the share of profits the investment manager partakes in for good performance. The term came from Renaissance Venice ship captains, who were paid an “interest” in a portion of the ship’s valuable cargo for safe passage—e.g., carrying the cargo….