The Tax Treatment of Carried Interest

Jason A. Sacks (J.D. 2012, Washington University), Note, Effective Taxation of Carried Interest: A Comprehensive Pass-through Approach, 89 Wash. U. L. Rev. 449 (2012):

Taxation of “carried interest” has been the subject of much recent scholarship. Articles have discussed the unfairness of taxing carried interest differently than other compensation for services, and addressed the dangers inherent in subjecting an intrinsically mobile tax base to rates higher than those presently applied to carried interest by the Internal Revenue Code. Most of this scholarship, however, erroneously ignores that fund managers who receive carried interest income are often in a position to significantly impact the U.S. economy. Ignoring this fact thereby forecloses an opportunity for Congress to utilize an efficient carried interest taxation regime as an instrument to promote its general economic goals, by means of rate differentials associated with policy objectives.

This Note will briefly discuss what constitutes carried interest and general tax policies and considerations. It will then discuss carried interest tax legislation recently proposed by Congress, address the legislation’s shortcomings, and propose an alternative carried interest taxation regime. Lastly, it will address opportunities available to Congress for utilizing carried interest tax legislation as a means to obtain policy objectives.