During a press conference at the White House on February 4, 2025, President Donald Trump fielded questions alongside Israel’s Prime Minister, Benjamin Netanyahu. The event, captured by photographer Andrew Caballero-Reynolds for AFP via Getty Images, was set against the backdrop of the East Room in Washington, DC.
When it comes to handling finances, investment managers often see management fees as part of their income, subject to regular income taxes. However, a significant portion of their earnings derives from something called carried interest, according to tax expert Steve Rosenthal.
### Bipartisan Calls for Carried Interest Reform
The concept of carried interest is a hot topic, with critics arguing that such earnings are more like wages and should be taxed accordingly at standard income tax rates. This has been a recurring theme across party lines, noted Garrett Watson, the director of policy analysis at the Tax Foundation. Despite this, pushback from industry lobbyists has been a consistent hurdle.
In a statement, the American Investment Council, which represents private equity, urged the Trump administration and Congress to maintain the current tax policy, highlighting its benefits for jobs, workers, small businesses, and local communities.
This debate isn’t new—Trump had promised to eliminate this tax advantage during his first term. However, the changes introduced in the 2017 Tax Cuts and Jobs Act were relatively minor, merely extending the holding period for qualifying long-term capital gains from over one year to three years. A subsequent proposal to push this period to five years under the 2022 Inflation Reduction Act was dropped due to the tight balance of power in the Senate and substantial industry opposition.
“The carried interest loophole is quite the conundrum,” Rosenthal observed. “Everyone seems willing to close it—except, of course, the private equity executives.”
### The Revenue Impact: Minimal at Best
As Republicans deliberate over spending priorities and explore funding options for Trump’s tax cuts, the debate around carried interest takes center stage. Nonetheless, revenue from eliminating this tax break would barely make a dent, according to Watson. It’s just a tiny fraction of the trillions needed to extend various expiring tax breaks and fulfill other fiscal commitments.
The Congressional Budget Office’s December estimate suggests that taxing carried interest as regular income could reduce the federal deficit by $13 billion over 10 years—a mere drop in the ocean when it comes to the broader financial landscape.
