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Illustration: Annelise Capossela/Axios

We're more than a decade into the political debate over how to tax carried interest, the profits earned by private fund managers on others investors' capital. And somehow the proposals are getting worse.

Background: For the uninitiated, carried interest is usually taxed as a capital gain, rather than as ordinary income.

Driving the news: A plan by House Democrats would significantly increase the amount of time the investment must be held to qualify for long-term capital gains tax treatment.

  • The current hold time is three years (increased via the 2017 tax bill), which would be extended to five years. This had been expected.
  • What wasn't expected is that the "clock" wouldn't begin until "substantially all" of the relevant fund's committed capital is invested, which lawyers suggest would be interpreted as around 80%.

The net result, in addition to increased federal tax revenue, would be to misalign general partners and limited partners (i.e., public pensions, university endowments, etc.).

  • Imagine a private equity firm raises a new fund today and buys Axios tomorrow. It plans to invest the fund over four years, and hits the 80% threshold in early 2025.
  • It now must hold Axios for a total of nine years, until 2030, to recognize the beneficial tax treatment. That's a very long time by private equity standards, and means that firms may pass up lucrative exit opportunities in the pursuit of future tax advantages. It also means there would be different tax rates for investments made early in a fund cycle and later in a fund cycle.

This isn't about protecting private equity or venture capital. My position on carried interest has been steadfast, agreeing with Presidents Obama, Trump and Biden that it should be treated as ordinary income.

  • But that's because I believe it is ordinary income, a fee for services.
  • Whether you agree or disagree, it's hard to see that opinion being swayed by if a company is bought at the beginning or end of a fund cycle.

Caveat: The entire Biden economic agenda, including tax reform, remains imperiled. So this might be a tempest in a shattered teapot.

Bottom line: I've previously referred to carried interest tax treatment as a political football whose continued controversy benefits both sides. What we're seeing now, though, is a fumble.

Go deeper

Focus group: Child tax credit expansion divides swing voters

Photo by Chip Somodevilla/Getty Images

Some swing voters say the most important elements to preserve in Democrats' massive social spending package are the ones that would lower prescription drug costs, reduce pollution and make childcare or pre-K free or more affordable.

Yes, but: Considerably less popular among Trump-to-Biden voters: Extending the expanded child tax credit to 2025.

White House unveils landmark reports on climate links to security, migration

Photo Illustration: Shoshana Gordon/Axios. Photo: John Moore/Getty Images

The Biden administration on Thursday released a sweeping set of assessments on how to view threats that climate change poses to national security and its role in fueling migration.

Why it matters: One of the key products, a formal National Intelligence Estimate on climate change, marks the first time all 18 elements of the U.S. intelligence community have released a consensus report on the topic.

Scoop: Garland defends DOJ's handling of Jan. 6 probe

Attorney General Merrick Garland. Photo: Kevin Dietsch/Getty Images

Attorney General Merrick Garland will tell the House Judiciary Committee on Thursday that federal prosecutors "are doing exactly what they are expected to do" in seeking accountability for the "intolerable assault" on the Capitol on Jan. 6, Axios has learned.

Why it matters: Allies of former President Trump, including Republican congressmen, have criticized the department's treatment rioters charged with crimes, and sought to recast the insurrection as a righteous protest. Garland's testimony with be his first appearance before the panel.

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