Something has changed this election season. The perennial hot button issue of carried interest, which offers sweetheart tax rates to wealthy private equity and hedge fund executives—and costs the U.S. Treasury billions of dollars—is getting a pass.
In prior years, lawmakers have used campaign season to seize on the carried interest loophole, pointing out how some PE execs have grown obscenely rich, and demanding a change to the tax rules. Even Donald Trump has made hay of the carried interest issue, claiming in 2016 that the “hedge fund guys are getting away with murder” and pledging to end the tax break.
This year, though, politicians have barely made a peep about carried interest. Does this mean that private equity and the hedge fund industry—which have long run stealth lobbying campaigns to protect their special goodie—have won for good?
Carried away
The notion of “carry”—which describes the cut of the profits executives receive for managing investments— is unfamiliar to many Americans but lies at the heart of one of the most secretive industries: private equity and the billions of dollars they are allowed to retain because of a beneficial tax treatment.
Private equity refers to firms that raise outside capital from investors like pension funds, insurance companies and high net worth individuals. They use this money, called the fund, to invest in companies, frequently taking control of these businesses. PE executives typically receive a share of the profits—the carry—for managing investments.
When a PE fund sells an asset, likely a portfolio company, at a higher price than what they bought, PE execs get carry. If the asset is sold after three years, the profit is taxed at a long-term capital gains rate of 20%. If they sell the business before the three years, the carry is taxed at a short term capital gains rate of 37%.
The problem is that the 20% tax rate is lower than what many everyday U.S. workers pay. A couple filing jointly, making under $200,000, faces a 22% tax rate, while a single person who makes under $192,000 is taxed at 24%, according to 2024 tax brackets. Critics of the carried interest loophole say carry should be classified as ordinary income because it’s part of a fund manager’s compensation. Under this argument, the carry would be taxed at the highest rate of 37%.
Then there’s all the revenue the U.S. Treasury could reap from closing the carried interest loophole. Private equity profits change each year but treating carried interest as ordinary income could raise $14 billion in tax revenues over 10 years, according to a 2022 report from the Congressional Budget Office.
Cathy Koch, vice president of tax policy at the Peterson Foundation, said the hundreds of tax breaks cost about $1.8 trillion a year, more than any government spending program, including social security. “As a nonpartisan 501(c)3 the Peterson Foundation doesn’t advocate for or against specific legislation or individual proposals, but there is no doubt that the tax code contains many tax breaks that need to be examined,” Koch said in an email. (The Peterson Foundation was founded by Pete Peterson, a Blackstone co-founder, who passed away in 2018.)
‘Getting away with murder’
Trump’s 2016 comment about the carried interest loophole letting “hedge fund guys” (and private equity guys) get away with murder has been a common sentiment among politicians for years. Former president Barack Obama, who was up for reelection, used carried interest to help defeat Mitt Romney, a Bain Capital co-founder, in 2012. The controversy has spurred numerous bills over the years to close the loophole but, every time, the financial industry has flexed its lobbying muscle to kill the efforts.
Trump’s tax reform bill of 2017, which largely favored the wealthy, did achieve a small concession, lengthening the hold period to obtain the favorable 20% rate from one to three years. But the underlying objection to the carried interest loophole—that it offers special tax rates to the very rich–remains very much a live issue.
The 2024 election campaign, which has been marked by a surge of populism on both the left and right, would seem to be a prime opportunity for candidates to make closing the loophole a rallying cry. Yet, just weeks to go until U.S. voters go to the polls, there’s hardly been any discussion about carried interest.
In March, President Joseph Biden released his Fiscal 2025 tax budget where he again called for an end to the carried interest loophole. This got airplay for a few days and then disappeared. Meanwhile, an Oxford study in June revealed that the largest private equity firms have avoided paying income taxes on more than $1 trillion of incentive fees since 2000—a line that seems tailor made for a campaign commercial—barely got any notice.
Now, any momentum to change the carried interest rate seems to have fizzled altogether. Just last week, former president Trump verbally sparred with Kamala Harris, the Democratic nominee for president and current VP, in a much watched 90-minute debate. Neither side mentioned carried interest or even taxes.
Even Elizabeth Warren, (D-Mass.), who has long battled against private equity and has introduced legislation in the past to end the loophole, has gone quiet. Warren is currently focused on private equity buying up vet practices and its impact on prices. Messages to Warren were not returned.
“The big issues in the election are jobs, inflation and immigration. Carry tax is not material to anything,” said one private equity executive.
Jessica Millett, a tax partner at law firm Hogan Lovells, said tax issues this election cycle are focused more on reducing taxes for the lower and middle class. She pointed to how both Harris and Trump have talked about making the child tax credit more generous. Both candidates also want to get rid of taxes on tips, with both of their proposals light on the details, Fortune reported.
"The candidates probably think they can get more traction at the moment among undecided voters with proposals to reduce their tax liability, as opposed to proposals to increase taxes on those benefiting from carried interest,” Millett said.
Private equity wins for now
The 2024 presidential candidates’ decision to seize on more familiar tax topics, like tips and child credits, partially explains why the carried interest debate has gone silent. But a case can be made that the lack of momentum to change the loophole is also rooted in policy arguments put forth by its defenders.
Brett House, a professor of professional practice in the economics division at Columbia Business School, acknowledged that the special tax treatment may seem unfair but there are reasons for it. Many other countries, outside of the U.S., follow a similar practice and impose lower tax rates for carried interest. “They’re trying to encourage investments,” House said. “It is hoped that [private equity] investment will increase the productive capacity and efficiency of the economy and thereby generate durable growth in output and income.”
One tax attorney, who declined to speak on the record, said it may seem like private equity isn’t paying its fair share of taxes. But the firms put much of their money back into companies, which creates jobs. From 2017 to 2022, private equity invested over $5 trillion in nearly 40,000 companies, according to PitchBook data.
The PE industry in the U.S. directly employed 12 million workers in 2022, up from 11.7 million in 2020, according to an April 2023 study prepared by EY for the American Investment Council, lobbyists for the PE industry. Private equity investments generated $1.7 trillion of gross domestic product in 2022, about 6.5% of total U.S. GDP.
“The whole point of the capital gains rate is to make more investments…the average person benefits from making the economy strong with strong jobs,” the attorney said.
Any change to the taxation of carried interest will likely not happen this election cycle, especially since control of Congress is split. Earlier this month, VP Harris, during a speech, said she supported a long-term capital gains increase from 20% to 28% for households making over $1 million. This is a break from Biden who wanted to boost the tax rate on capital gains to 39.6% for individuals earning more than $400,000. The increase makes it seem that Harris is more business friendly than Biden but it's far short of closing the loophole.
Private equity executives questioned by Fortune aren’t worried. Even if Harris decides to do more than talk about capital gains, nothing will likely change, one private equity exec said. “The president doesn’t get to change the tax law. Congress changes tax law,” they said.
