In keeping with other proposals to raise taxes on the wealthy, Barack Obama campaigned on a promise to tax carried interest at the same rate as regular income.
Carried interest is a way of compensating executives by giving them ownership stakes, or "interest," in a business. Carried interest is taxed as a capital gain, which has a lower tax rate than ordinary income.
Hedge fund and private equity fund managers who work as partners are compensated in way that takes the form of "interest" in a given business. Instead of taxing this compensation as normal income, the tax code considers it a long-term capital gain taxed at 15 percent. Given that the top tax rate for ordinary income is 35 percent, that can be quite a savings for high earners.
President Barack Obama included the proposed change in his budget proposal for fiscal 2013, unveiled Feb. 13, 2012. But the chances of winning on this issue in an election year are not high.
"Anything that has anything to do with taxes is going to be highly sensitive, and we already know carried interest is sensitive," said Ed Karl, vice president for tax at the American Institute of CPAs. "Will it be enacted? There's a good chance that very little will be enacted this year."
Steve Rosenthal, visiting fellow at the Urban Institute-Brookings Institution Tax Policy Center, gave it slightly better odds. Rosenthal, who opposes the capital gains treatment of carried interest, said he thinks the carried-interest loophole will eventually be closed despite a skillful lobbying campaign to preserve it. "Whether it happens this year or next year, I can't say … It's almost a crap-shoot."
Defenders of the tax treatment have argued that any changes should be part of a larger review of capital gains taxes, including in other industries such as real estate, Rosenthal said. "It's a fantastic lobbying strategy that has just tied carried interest in knots."
Eventually there might be a year-end deal that would include treating part of what is now taxed as carried interest as ordinary income but not all of it, he said, but probably not until after the election if at all. "It's 50-50 at best."
If that comes to pass before the end of Obama's term, we'll re-rate this promise, but for now we consider it Stalled.