Sign up for our daily briefing

Make your busy days simpler with Axios AM/PM. Catch up on what's new and why it matters in just 5 minutes.

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Catch up on coronavirus stories and special reports, curated by Mike Allen everyday

Catch up on coronavirus stories and special reports, curated by Mike Allen everyday

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Denver news in your inbox

Catch up on the most important stories affecting your hometown with Axios Denver

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Des Moines news in your inbox

Catch up on the most important stories affecting your hometown with Axios Des Moines

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Minneapolis-St. Paul news in your inbox

Catch up on the most important stories affecting your hometown with Axios Twin Cities

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Tampa Bay news in your inbox

Catch up on the most important stories affecting your hometown with Axios Tampa Bay

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Charlotte news in your inbox

Catch up on the most important stories affecting your hometown with Axios Charlotte

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!
The Issue

President Trump said during the campaign that he wants to raise taxes on investment profits earned by managers of hedge funds, private equity funds, venture capital funds and similar sorts of partnerships.

The Facts

Most of these funds pay their managers in two ways:

  1. An annual fee on the total amount of committed capital. It's typically around 2%, and is generally paid no matter how the investments perform.
  2. Carried interest, which usually works out to around 20% of investment profits.

So if a private equity fund generates $100 million in profits, the fund managers retain $20 million. Okay, technically it's a bit more complicated, since profit-sharing goes deal-by-deal and first subtracts paid fees, but this is the basic idea.

Fund managers pay ordinary income taxes on the management fees, but only pay much-lower capital gains rates on the carried interest (so long as the investment was held for a long enough period of time, which doesn't apply to certain short-term hedge fund plays). The outside investors pay capital gains rates on their 80% of profits (unless they are tax-exempt institutions like charities or university endowments).

Proponents of the current system argue that all of a fund's investment profits are capital gains, and it doesn't matter how the various partners agree to split the spoils. Opponents argue that carried interest in essentially a fee for service (kind of like a stock-broker or wealth manager), and that this is an unjust loophole. No one argues that the outside investors shouldn't continue to pay capital gains rates, or that fund managers should pay ordinary income on profits derived from their personal investments into the funds.

What's Next

President Trump campaigned on changing the tax treatment of carried interest, as did Hillary Clinton (and Barack Obama, for that matter). Paul Ryan, however, has not taken a public position, nor did he include a change to carried interest in his "Better Way" proposal. Expect this to become part of the upcoming debate over corporate tax reform.

Go deeper

Mike Allen, author of AM
2 hours ago - Politics & Policy

Biden's "overwhelming force" doctrine

President-elect Biden arrives to introduce his science team in Wilmington yesterday. Photo: Kevin Lamarque/Reuters

President-elect Biden has ordered up a shock-and-awe campaign for his first days in office to signal, as dramatically as possible, the radical shift coming to America and global affairs, his advisers tell us. 

The plan, Part 1 ... Biden, as detailed in a "First Ten Days" memo from incoming chief of staff Ron Klain, plans to unleash executive orders, federal powers and speeches to shift to a stark, national plan for "100 million shots" in three months.

Off the Rails

Episode 2: Barbarians at the Oval

Photo illustration: Sarah Grillo/Axios. Photo: Jim Watson/AFP/Getty Images

Beginning on election night 2020 and continuing through his final days in office, Donald Trump unraveled and dragged America with him, to the point that his followers sacked the U.S. Capitol with two weeks left in his term. This Axios series takes you inside the collapse of a president.

Episode 2: Trump stops buying what his professional staff are telling him, and increasingly turns to radical voices telling him what he wants to hear. Read episode 1.

President Trump plunked down in an armchair in the White House residence, still dressed from his golf game — navy fleece, black pants, white MAGA cap. It was Saturday, Nov. 7. The networks had just called the election for Joe Biden.

Fringe right plots new attacks out of sight

Illustration: Aïda Amer/Axios

Domestic extremists are using obscure and private corners of the internet to plot new attacks ahead of Inauguration Day. Their plans are also hidden in plain sight, buried in podcasts and online video platforms.

Why it matters: Because law enforcement was caught flat-footed during last week's Capitol siege, researchers and intelligence agencies are paying more attention to online threats that could turn into real-world violence.