Changes

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://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/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===

Those who argue against treating investment funds' profits as capital gains have two primary points: