But the revenue isn’t the point. The lurid inequity of the carried interest loophole has been common knowledge since 2006, when Victor Fleischer, now professor of law at the University of California Irvine, called its preservation “an untenable position as a matter of tax policy.” The tax break, Fleischer explained, had been tolerable in the 1950s and 1960s because the private equity business was, back then, dominated by individual investors with limited access to capital. It became intolerable when these “risk-seeking investment cowboys” were displaced by large institutional investors, and as “regulatory gamesmanship” prompted general partners at these firms to reclassify management fees as carried interest.
It’s hard to find people—even rich people—who disagree with Fleischer’s analysis. JPMorgan Chase Chief Executive Jamie Dimon wants the carried interest loophole gone. So does Warren Buffett, the fifth richest human on Planet Earth. President Trump campaigned against the carried interest loophole in 2016, and in his otherwise regressive 2017 tax law, he imposed the three-year holding requirement that Congress now wants to extend to five years. If you’re going to tax carried interest at the rate for “long-term” capital gains, why not make the holder actually hold it for the long term? The five-year holding period would effectively repeal the carried interest loophole because few financiers will be willing to defer cashing out for that long. Remember, this is compensation for their labor, not a return on their financial investment. You don’t have to invest a penny of your own cash to receive carried interest, but even so it’s taxed as if it were an investment.
The private equity industry disagrees with Dimon and Buffett and Trump. It wants to preserve the carried interest loophole, for the simple reason that nobody ever wants to pay more in taxes. (Do you?) According to a Wall Street Journal review of securities filings, 28 executives at five of the biggest publicly traded private equity firms received a combined $760 million last year in carried interest compensation. Stephen Schwarzman, chief executive of the Blackstone Group, the biggest private equity firm, received nearly $150 million last year in carried interest compensation.