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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<ref name="taxpolicycenter" />. The Carried Interest Debate 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<ref name="bell" /> rather than 39.6 percent<ref name="taxbracket" />[http://taxfoundation.org/article/2016-tax-brackets] and receiving 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.
==Private Investment Fund Structure==
Before considering carried interest, one must first have a basic understanding of the organizations that currently benefit from it. Private investment funds, set up as limited liability companies or limited partnerships, invest capital in order to attain returns for investors. These funds are organized under general partners and limited partners. The general partners are the funds' managers or managing firms. The limited partners are the funds' investors who typically include pension funds, insurance companies, and wealthy individuals. Types of private investment funds consist of private equity funds, venture capital funds, and hedge funds.
==Carried Interest==
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:<ref name="fleischer" //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<ref name ="gilson" /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].
===The Debate===
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[http://www.opensecrets.org/industries/totals.php?cycle=All&ind=F] was donated to democratic and republican congressional campaigns by financial institutions 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[http://thehill.com/blogs/congress-blog/economy-budget/257083-what-the-carried-interest-tax-loophole-reveals-about-our].
<ref name="taxpolicycenter">[http://www.taxpolicycenter.org/briefing-book/what-carried-interest-and-how-should-it-be-taxed] 'What is carried interest, and how should it be taxed?', ''Tax Policy Center'',(Washington D.C.), </ref>
<ref name="fleischer">[http://victorfleischer.com/wp-content/uploads/2009/12/Two-and-Twenty.pdf ] 'Two and Twenty: Taxing Partnership Profits in Private Equity Funds',''New York University Law Review'', (New York City: April 2008) </ref>
http://www.streetofwalls.com/articles/private-equity/learn-the-basics/how-private-equity-works/
https://www.fas.org/sgp/crs/misc/RS22689.pdf
<ref name = "gilson">[http://poseidon01.ssrn.com/delivery.php?ID=348094069068097094119089120112004024054087061054024018026092001024067007096126013011014037019082006125120095096037013030043064065100012004082097077088071121070043086031006071066117117091087085111069104075106102002127095082006102088108080070004&EXT=pdf ] R. Gilson, 'Engineering a Venture Capital Market: Lessons from the American Experience', ''Standford Law School'', (Stanford: November 2002) </ref>
http://poseidon01.ssrn.com/delivery.php?ID=060100116086005026119081093099074076000050041076022024096099094109098086118078071127048021127015040030058020018027010092124099126094082050028021026006001124025056007031006068110014097117083118121111076105007025111126100022121109027085075095022026&EXT=pdf
