Changes

Carried interest is an ongoing issue for politicians, the public, and investors alike. Due to the ambiguity of the issue and substantial lobbying on the part of financial institutions, the opponents of carried interest have had little success with policymakers. Opensecrets.org reports that more than $1.1 billion was donated to congressional democratic and republican campaigns in the years 2012 and 2014. Although, presidential nominees Donald Trump and Hillary Clinton have both come out in opposition of carried interest as they advocate taxing capital gains as ordinary income.

*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.

*The second and more emphasized point is that carried interest is subject to the capital gains tax rate mentioned in the previous section. 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.