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Carried interest is a form of performance-based compensation that general partners of private investment funds receive in exchange for their work. It is generally calculated as 20 percent of a fund's profits[http://www.taxpolicycenter.org/briefing-book/what-carried-interest-and-how-should-it-be-taxed]. The Carried Interest Debate revolves around the controversial tax policy imposed upon carried interest in the U.S. Currently, carried interest is treated as a capital gain for tax purposes rather than ordinary income, which results in it being taxed at a maximum rate of 20 percent[http://www.bankrate.com/finance/taxes/capital-gains-tax-rates-1.aspx] rather than 39.6 percent[http://taxfoundation.org/article/2016-tax-brackets] and receiving a perceived advantageous tax deferral. Opponents of carried interest criticize this tax policy for being unjust. Its supporters argue that the policy is necessary to encourage investment activity.

==Private Investment Fund Structure==

In reality, the lines between these types of funds can often be blurred, but the key distinctions can be summarized as follows:

*Private equity funds generally invest in large companies with the intent to restructure and sell the firms for a gain. These investments usually entail acquiring controlling interests in public companies through stock purchases, but they may also involve acquiring private companies. In the case of the public company, funds oftentimes take the company private before the resale or new initial public offering. The process by which private companies are brought to liquidity is similar sans the return from public to private. Private equity funds usually employ a long-term, hands-on approach to investment.

*Hedge funds tend to focus on achieving high returns through risky, short-term investments that may come in the form of stocks, bonds, commodities, derivatives, and anything else that promises a quick gain. Accordingly, hedge funds tend not to adopt the same hands-on approach to investment that venture capital and private equity funds do.

Those in favor of the current treatment of carried interest argue that the general partner's role is more analogous to that of an entrepreneur. Just as an entrepreneur sells his or her business and is taxed at the capital gains rate, so too should the general manager be taxed on his or her realized gains at the capital gains rate. Further, it is claimed that a higher tax rate would reduce incentive for general partners to take risks. This lack of incentive would then discourage innovation and efficiency in markets. Although, it is not clear whether there is evidence for these claims or if the risks general partners take on provide a benefit to the economy as a whole[https://www.cbo.gov/budget-options/2013/44804].

==References==

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