S-4330-119
Read twice and referred to the Committee on Finance.
Sponsored by Ron Wyden (D-OR)
What it does
This bill would eliminate the preferential capital gains tax rate on "carried interest" — the share of profits that investment fund managers (such as private equity, hedge fund, and venture capital managers) receive as compensation. Under current law, carried interest is often taxed at the lower long-term capital gains rate (typically 20%). This bill would require that income to be taxed at the higher ordinary income rate (up to 37%), treating it the same as wages and salaries.
Who benefits
The federal government would collect additional tax revenue. Salaried workers and other taxpayers whose compensation is already taxed at ordinary income rates would see a more uniform tax treatment relative to fund managers. Small business owners and self-employed individuals who cannot structure their compensation as capital gains would benefit from a more level playing field. Competitors of private equity-backed companies may benefit if higher tax burdens reduce the capital available for leveraged buyouts.
Who is hurt
Private equity fund managers, hedge fund managers, venture capital managers, and real estate fund managers who currently receive carried interest would face higher tax bills on that portion of their income. Pension funds, university endowments, and other institutional investors that rely on private equity and venture capital returns could see reduced fund performance if managers adjust fee structures or fund activity in response. Startup companies and early-stage businesses that depend on venture capital funding could face reduced investment availability if fund formation declines.
Supporters argue
Supporters argue that carried interest is functionally a fee for managing other people's money — not a return on the manager's own invested capital — and that taxing it at the capital gains rate creates an inequity where a hedge fund manager pays a lower rate than a nurse or teacher earning the same dollar amount. They point to Joint Committee on Taxation estimates that the carried interest preference costs the federal government several billion dollars annually, and contend that closing it would align the tax code with the principle that compensation for services should be taxed as ordinary income regardless of how it is structured.
Opponents argue
Opponents argue that carried interest represents a legitimate return on risk, since fund managers typically receive it only if the fund generates profits above a set threshold, and that managers often invest their own capital alongside limited partners. They contend that reclassifying carried interest as ordinary income would reduce incentives for long-term investment, potentially shrinking the pool of capital available to startups and growing businesses, and cite studies suggesting that private equity-backed firms account for a significant share of U.S. job creation. They further argue that the revenue gain is modest relative to the potential disruption to capital formation.