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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[[categoryhttp:McNair Projects//www.taxpolicycenter.org/briefing-book/what-carried-interest-and-how-should-it-be-taxed]]{{McNair Projects|Project Title=. The Carried Interest Debate (Wiki Page)|Topic Area=Economic 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 Business Trends|Owner=Jake Silberman|Start Term=Summer 2016|End Term=TBD|Status=In Writing|Deliverable=Wiki Page|Audience=Entrepreneurs, General Public|Skills Needed=Writing I|Primary Billing=Drreceiving 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. Edward Egan}} ==Private Investment FundStructure==

*Private equity funds generally invest in large companies with the intent to restructure and sell the firms for a gain. These investments usually entail the acquisition of private acquiring controlling interests in public companiesthrough stock purchases, but they may also involve acquiring controlling interests in 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 through stock purchasesare 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. *Venture Capital funds aim to invest in small to mediumhigh-size tech startups with high-growth potential in exchange for a stake in the company. Once the fund purchases a stake in the company, it also provides coaching and other services to the company in order to increase its chances of success. Similar to private equity funds, venture capital funds invest with a hands-on, long-term strategy with the eventual goal of a liquidity event, i.e. a(n) acquisition, merger, or initial public offering (more about VC [[Defining Venture Capital (Blog Post)| here]]).*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 funds and private equity funds takedo.

Recall the structure of a private investment fund. General partners are compensated for managing their private investment funds through management fees and carried interest. Management fees are consistently around 2 percent of a fund's assets under management and are paid regardless of the fund's performance. Carried interest, alternatively, serves to join the incentives of the general partners with the interests of the limited partners by providing performance -based compensation for the general partners. When a private equity or hedge fund surpasses its hurdle rate of return, usually about 8 percent, the general partners will typically receive around 20 percent of the profits as compensation[http://victorfleischer.com/wp-content/uploads/2009/12/Two-and-Twenty.pdf]. The general partner in a venture capital fund, on the other hand, will consistently receive 20 percent of the profits as long as the limited partners have received a return at least equal to their contributed capital[http://poseidon01.ssrn.com/delivery.php?ID=348094069068097094119089120112004024054087061054024018026092001024067007096126013011014037019082006125120095096037013030043064065100012004082097077088071121070043086031006071066117117091087085111069104075106102002127095082006102088108080070004&EXT=pdf]. This 20 percent, in combination with any other profit the general partner may receive from their own stake in the fund, is treated as a capital gain for tax purposes. The 2 percent management fee is treated as ordinary income for tax purposes[http://victorfleischer.com/wp-content/uploads/2009/12/Two-and-Twenty.pdf]. The maximum rate for a capital gains tax is 20 percent[http://www.bankrate.com/finance/taxes/capital-gains-tax-rates-1.aspx], compared to the maximum rate for an ordinary income tax of 39.6 percent[http://taxfoundation.org/article/2016-tax-brackets].

Those who argue against treating investment funds' profits as capital gains have two primary points. The first of which is that carried Carried interest is only taxed when it is realizedan ongoing issue for politicians, the public, and investors alike. Through this tax deferral, Due to the ambiguity of the carried interest can benefit from issue and substantial lobbying on the time value part of money. Thusfinancial institutions, the general partners at the private investment funds then opponents of carried interest have what some perceive to be unfair tax advantagehad little success with policymakers. Opensecrets. The second and org reports that more emphasized point is that carried interest is subject than $1.1 billion[http://www.opensecrets.org/industries/totals.php?cycle=All&ind=F] was donated to the capital gains tax rate mentioned democratic and republican congressional campaigns by financial institutions in the previous sectionyears 2012 and 2014. Opponents Although, presidential nominees Donald Trump and Hillary Clinton have both come out in opposition of such treatment consider carried interest to be a performance based compensation, much like a bonus, and accordingly believe it should be taxed at the as they advocate taxing capital gains as ordinary income rate[http://thehill. In their argument, com/blogs/congress-blog/economy-budget/257083-what-the opponents frequently compare general partners' roles to those of corporate executives and mutual fund managers who are subject to the ordinary income rate-carried-interest-tax-loophole-reveals-about-our].

Those who argue against treating investment funds' profits as capital gains have two primary points: *The first of which is that carried interest is only taxed when it is realized. Through this tax deferral, the carried interest can benefit from the time value of money. Thus, the general partners at the private investment funds then have what some perceive to be unfair tax advantage. The limited partners, if they are taxable, are then at a comparative tax disadvantage because they cannot receive a deduction for the carried interest when it is granted. If they are not taxable, as many limited partners aren't i.e. pension funds, then the government loses tax revenue. The tax deferral argument is particularly more relevant when it comes to funds that are not persistent in their performance. When a fund is consistent in its increasing returns, as venture capital funds tend to be, the deferred taxes grow greater over time. When a fund has inconsistent returns, the smaller deferred taxes from bad years offset the higher deferred taxes from successful years[http://victorfleischer.com/wp-content/uploads/2009/12/Two-and-Twenty.pdf]. *The second and more emphasized point is that carried interest is subject to the capital gains tax rate mentioned before. Opponents of such treatment consider carried interest to be a performance-based compensation, much like a bonus, and believe it should be taxed at the ordinary income rate. In their argument, the opponents frequently compare general partners' roles to those of corporate executives and mutual fund managers who are subject to the ordinary income rate[https://www.cbo.gov/budget-options/2013/44804]. 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]. ==Related Pages==[[Access to Capital]] Owner: [[Jake Silberman]]

http://www.taxpolicycenter.org/briefing-book/what-carried-interest-and-how-should-it-be-taxedBasic carried interest description http://www.ntanet.org/NTJ/61/3/ntj-v61n03p445-60-taxation-carried-interest-understanding.pdf In depth descriptions of effects of carried interest and its treatment http://victorfleischer.com/wp-content/uploads/2009/12/Two-and-Twenty.pdf Academic paper good for detailing private equity and hedge fund situation than venture capital http://www.streetofwalls.com/articles/private-equity/learn-the-basics/how-private-equity-works/ Quick summary of private equity fund structure  http://www.investopedia.com/articles/investing/102515/carried-interest-loophole-americas-tax-code.asp Quick summary of carried interest loophole, potentially not necessary at this point https://www.cbo.gov/sites/default/files/110th-congress-2007-2008/reports/09-06-carriedinterest_testimony.pdf CBO details tax issues surrounding carried interest http://www.investopedia.com/ask/answers/121614/what-difference-between-hedge-fund-and-private-equity-fund.asp Difference between hedge funds and private equity funds

http://www.ntanetbankrate.orgcom/NTJfinance/61taxes/3/ntj-v61n03p445-60capital-taxationgains-carriedtax-interestrates-understanding1.pdfaspx Capital gains tax rates

http://victorfleischertaxfoundation.comorg/wp-contentarticle/uploads/2009/12/Two2016-andtax-Twenty.pdfbrackets Ordinary income tax rates

httphttps://www.streetofwallsfas.comorg/articlessgp/private-equitycrs/learn-the-basicsmisc/how-private-equity-worksRS22689.pdf Tax treatment of carried interest/Tax benefits from deferral of income

http://wwwposeidon01.investopediassrn.com/articles/investing/102515/carried-interest-loophole-americas-tax-codedelivery.aspphp?ID=348094069068097094119089120112004024054087061054024018026092001024067007096126013011014037019082006125120095096037013030043064065100012004082097077088071121070043086031006071066117117091087085111069104075106102002127095082006102088108080070004&EXT=pdf Detailed overview of venture capital system

httpshttp://wwwposeidon01.cbossrn.govcom/sites/default/files/110th-congress-2007-2008/reports/09-06-carriedinterest_testimonydelivery.php?ID=060100116086005026119081093099074076000050041076022024096099094109098086118078071127048021127015040030058020018027010092124099126094082050028021026006001124025056007031006068110014097117083118121111076105007025111126100022121109027085075095022026&EXT=pdfPersistence in VC and buyout (I think private equity) funds

http://wwwposeidon01.investopediassrn.com/ask/answers/121614/what-difference-between-delivery.php?ID=827006111117101076120127100094005111103049014093061025126075006126024094004067006067098030052002015017013092031071074023126005052019045093022024030088100111030086041039086122093005127112071088088083006093097112086026017003096006001105007085116120006&EXT=pdf Persistence in hedge-fund-and-private-equity-fund.aspperformance

http://www.bankratethehill.com/financeblogs/congress-blog/taxeseconomy-budget/capital257083-gainswhat-the-carried-interest-tax-ratesloophole-1.aspxreveals-about-our Carried interest in politics/Fund participation in politics

http://taxfoundationwww.opensecrets.org/articleindustries/2016-tax-bracketstotals.php?cycle=All&ind=F Lobbyist spending

https<includeonly>[[Category:McNair Projects]][[Internal Classification: Wiki Page| ]]<//www.fas.org/sgp/crs/misc/RS22689.pdfincludeonly><!-- flush -->

http[[Category://poseidon01.ssrn.com/delivery.php?ID=348094069068097094119089120112004024054087061054024018026092001024067007096126013011014037019082006125120095096037013030043064065100012004082097077088071121070043086031006071066117117091087085111069104075106102002127095082006102088108080070004&EXT=pdfInnovation Policy]]