Effort to increase taxes on 'carried interest' falls short again

During the 2008 presidential campaign, Barack Obama pledged to tax carried interest at the same rate as regular income, rather than at the lower capital-gains rate, as is currently the case.

What is carried interest? Private-equity firms (which buy, invest in, help manage and eventually sell companies) and hedge funds (which invest in a wide variety of markets) are run by managers on behalf of outside investors. When profits from a firm's investments are disbursed, they are typically distributed according to each investor's stake. This income is taxed on each individual's tax return, usually at the capital-gains rate of 15 percent.

Fund managers may receive some income this way, but there's a separate stream of income that is usually more lucrative for them. Usually they get 20 percent of the profits as a performance-based bonus, "carried over" for years at a time (thus the name, "carried interest"). This payment is then taxed at capital gains rates of 15 percent -- less than if it were salary or wages.

The hefty tax rate advantage for carried interest has spawned criticism. The Congressional Research Service says the dispute boils down to opposing views of what carried interest represents. Obama and his allies say carried interest is essentially a management fee rather than investment profits from an ownership stake, and should be taxed like regular income. Opponents say it's more like like investment income.
   
Obama included the proposed change in his budget proposal for fiscal 2013, unveiled on Feb. 13, 2012. Mitt Romney, who co-founded and ran Bain Capital, a private-equity firm, had a lot of carried interest income over his working career, making it a topic of particular interest during 2012.

But neither of these factors provided much momentum for the effort to change the tax treatment of carried interest. The provision did not make it into the biggest tax bill of 2012, the last-minute "fiscal cliff” bill that passed on Jan. 1, 2013. So we rate this a Promise Broken.