Taxing "carried interest"
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.
Most of these funds pay their managers in two ways:
- 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.
- 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.