The Tax Hike on Carried Interest

Abstract

Congress is considering a bill that would increase taxes on the carried interest managers of private equity funds, hedge funds, and real estate funds receive. Although the arguments commonly made for the proposed change seem plausible at first glance, most of their plausibility disappears upon further scrutiny because most of these arguments are based on misunderstandings about carried interest and its tax treatment. It would be unwise to adopt this tax increase on investment when there is no compelling case that it will produce a more efficient allocation of capital.