Carried Interest Tax Break Costs The Government Billions, Is A Gift To Financiers: The New Yorker

05/08/2010 05:12 am ET | Updated May 25, 2011
  • James Surowiecki

In a typical private-equity fund, the managers get paid two per cent of assets as a regular fee, plus twenty per cent of the fund's profits. They pay regular income tax on the two per cent. But on their share of the profits, which is called "carried interest," they usually pay only long-term capital gains--even though they put up hardly any of the fund's actual capital, most of which comes from outside investors. The difference in tax rates saves private-equity managers billions of dollars a year, and means that they pay taxes at a much lower rate than, say, your average lawyer. It also means that their taxes are lower than those of people who do the same kind of work, or get the same kind of pay, as they do.