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Carried interest is a form of performance-based compensation that general partners of various types of private investment funds receive in exchange for their work. It is generally calculated as 20 percent of a fund's profits. The Carried Interest Debate revolves around treatment of carried interest in taxes. 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 rather than 39.6 percent and receiving a perceived advantageous tax deferral. Opponents of carried interest find this treatment unjust whereas its supporters find it necessary to encourage investment.

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.

In reality, the lines between these types of funds can often be blurred, but the key distinctions can be summarized as follows:

*Private equity funds generally invest in large companies with the intent to restructure and sell the firms for a gain. These investments usually entail acquiring controlling interests in public companies through stock purchases, but they may also involve acquiring private companies. In the case of the public company, funds oftentimes take the company private before the resale or new initial public offering. The process by which private companies are brought to liquidity is similar sans the return from public to private. Private equity funds usually employ a long-term, hands-on approach to investment.

*Venture Capital funds aim to invest in high-tech startups with high-growth potential in exchange for a stake in the company. Once the fund purchases a stake in the company, it also provides coaching and other services to the company in order to increase its chances of success. Similar to private equity funds, venture capital funds invest with a hands-on, long-term strategy with the eventual goal of a liquidity event, i.e. a(n) acquisition, merger, or initial public offering.

==Carried Interest==