Carried Interest

May 26, 2010

dictionary-150[Note: Updated on 2.16.2011]

What is carried interest?

Carried interest is a manager's share of the profits of a hedge fund or private equity fund. It is meant as incentive to the manager and also often serves as his or her primary source of income.

What’s the significance?

Under the Bush tax laws, carried interest is taxed as return on investment, rather than as income. This is a big difference -- the percentage goes from 35% taken from regular income (like our paychecks) down to about 15% taken from return on investment. It is often seen as a huge loophole for wealthy fund managers, who are effectively receiving a salary without paying normal income taxes like the rest of us.

Who's talking about it?

Digby at Salon is sick of millionaires defending these loopholes while asking the rest of us to tighten our belts...Peter Peterson, the deficit hawk with a large role to play in Obama's deficit commission, is reaping the benefits of the tax law while he advises that we must cut entitlement programs...Linda Beale at Angry Bear muses on how hard it is for Congress to get rid of the loophole...James Kwak at The Baseline Scenario discusses the relevance for venture capital fund managers...Rep. Paul Ryan's budget roadmap would allow financiers to shelter even more...President Obama's 2012 budget includes a proposal to tax carried interest as income.

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