The Tax Treatment of Carried Interest
Congress is considering proposals to increase the taxation of “carried interest” - integral feature of the financial arrangements of partnerships. Taxing carried interest is not a matter of fairness or closing loopholes. Increasing taxes on carried interest would constitute a potentially large tax increase on partnerships – especially in finance, insurance, and real estate – both in dollar terms and relative to the income generation of the affected partners. The specter of these tax implications will spawn reactions ranging from legal restructuring to crowding out valuable real economic transactions that are not sufficiently profitable to carry the additional burden. Perhaps most damaging, the higher taxes on carried interest will re-allocate managerial talent, as the entrepreneurially-inclined are deterred by these higher taxes and seek their outlets elsewhere in the economy. The proposed tax treatment is inconsistent with basic principles of tax policy.
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