How Obama Can Increase Taxes on Carried Interest

President Obama could change the tax treatment of carried interest with a phone call to the Treasury Department. But the White House will need a precise understanding of the regulatory landscape to make a change that is fair, easy to administer, and will hold up in court.

The administration has increasingly relied on executive branch rule-making authority to make policy without waiting for a gridlocked Congress to act. The White House has made significant changes to education policy, immigration policy, environmental standards and climate change policy, and, most recently, student loans. And it has the legal authority to unilaterally change the tax treatment of carried interest.

Managers of private equity, venture capital and other private investment funds receive a share of the profits, known as carried interest, in exchange for the services they provide. Under current law, the income they earn is often taxed at the long-term capital gains rate of 20 percent. That’s less than half the rate most would pay if their income were taxed as ordinary income, once you add payroll taxes to the top marginal rate of 39.6 percent.

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