Eliminate the Carried Interest Deduction

Estimated Revenue:
$63.1 billion

2024–2033. This score was generated by the Joint Committee on Taxation for Senator Wyden’s Ending the Carried Interest Loophole Act.

Summary

The “carried interest loophole” refers to the special tax treatment of compensation paid to investment managers. Because actual investors are investing money that has already been taxed, because that investment carries risk, and because tax policy should encourage investment, capital gains are typically taxed at a lower rate (0% before a certain threshold, then 15–20%) than ordinary income (22–37% above a similar threshold). But under current law, investment managers’ income is treated as “capital gains,” even though it is ordinary in every meaningful respect. These managers do not have to put their own capital at stake and they receive the income as compensation for services rendered.

Investment managers should be required to declare all income annually and pay tax on it at ordinary income or self-employment rates. Where fund managers become partners in longer-term investments and where tax on those investments is typically deferred until the investment returns are realized, the tax code should distinguish between the investor’s portion of the investment and the manager’s portion, treat the manager’s portion of the return as “deemed compensation” from the investor, and tax deemed compensation annually as ordinary income rather than as capital gains.

The Case for Eliminating the Carried Interest Deduction

In a free economy, those providing the capital for investment put themselves at risk for the sake of potential reward. But those who receive the primary benefit of the carried interest deduction (i.e., investment managers) are deploying other people’s income. Investment managers should not receive lower rates on their income when the actual investor of capital, not the manager, bears the real risk. The carried interest loophole not only distorts the relationship between risk and reward, but also draws more of America’s talent pool toward careers in finance rather than engineering, science, and traditional business management. There is no reason such a career should receive a tax advantage over others. 

President Trump has called for closing this loophole both in his 2016 campaign tax reform plan and in a February 2025 statement to GOP House leaders. Recent legislation to end the deduction include the Ending the Carried Interest Loophole Act, sponsored by Sen. Ron Wyden (D-OR), and the Carried Interest Fairness Act, sponsored by Sen. Tammy Baldwin (D-WI) and Rep. Marie Gluesenkamp Perez (D-WA).