Under Biden or Trump, taxing carried interest is stupid and destructive policy

No matter who’s in charge of the presidency or Congress, flawed proposals to close the so-called carried interest loophole just keep coming back. News outlets reported last week that in addition to asking House Speaker Mike Johnson to raise top tax rates, President Trump requested tax hikes for carried interest earned in business partnerships.

Since no new arguments are being offered in favor of this tax hike, I will recap the points I made when President Biden proposed it as part of his infrastructure plan in 2021 and when Congressional Democrats proposed it as a revenue raiser for the Inflation Reduction Act in 2022.

I wrote then that “the carried interest tax is a direct attack on the structure of partnerships that are used by innovative businesses—from small firms to venture capital and angel investors — that take risks and make an outsized contribution to economic growth and job creation.”

The tax treatment of carried interest, I explained, was not a “loophole,” but just the longstanding treatment of partnerships under tax law. From my previous writings:

In all types of partnerships—from hedge funds to venture capital to small businesses—the partners are taxed on a business’ earnings at individual tax rates, instead of the business being taxed at corporate rates and then doubly taxed on any dividends it pays out. In many partnerships, some partners get bigger stakes in the company because of the services they perform, in addition to the capital they have contributed. This is called the “carried interest.”

The individual with the carried interest is taxed at the rates of ordinary income for his or her salary and for much of the business’ activities. But these partners pay the individual capital gains rate when the other partners receive capital gains for sales of such assets as stock and real estate.

Hiking the carried interest tax, I wrote, would hit not just private equity and venture capital, although I have defended both as vehicles for boosting returns for all investors and implementing governance reforms at troubled companies. Rather, a carried interest tax hike would hit all types of partnerships, including doctors’ offices and family farms.

I cited a 2011 study by the accounting firm Ernst & Young, “flow-through businesses” such as partnerships and limited liability companies “employ more than one-half of the private sector workforce in every state except for Delaware and Hawaii.” To update this, a 2024 study found that these businesses employed 43 percent of the US workforce.

Finally, I noted that in a 2021 address to Congress, Biden spoke of “winning the future for America,” but “his proposed tax hikes on innovation and entrepreneurship are a recipe for, to borrow his phrasing, losing the future.” In the parlance of today’s president, carried interest tax hikes would directly undermine the goals of ushering in a golden age and making America great.