Understanding Carried Interest

By Alan D. Viard

Mitt Romney’s release of his tax returns has pushed the arcane issue of “carried interest” — the share of an investment fund’s profits given to its managers as payment for their services – back into the headlines. Critics have renewed their calls to tax the carried interest as ordinary income. Unfortunately, the populist rhetoric used by some critics can obscure the facts about how carried interest is actually taxed.

Some critics assert that all carried interest is taxed at the lower 15 percent that applies to capital gains and dividends. They complain that these funds are able to “turn” ordinary income into capital gains and dividends by paying managers in carried interest rather than salary, and that the funds are exploiting a special loophole not available to other firms. Looking at how carried interest works reveals that none of these things are true.

Read more: http://www.nationalreview.com/articles/289610/understanding-carried-interest-alan-d-viard