President Biden’s American Families Plan, announced in April, is a proposal for massive infrastructure projects throughout the U.S. that will be partially paid for by increasing taxes on the wealthiest individuals, raising the corporate tax rate and eliminating the carried-interest tax advantage that allows general partners at private equity firms to pay capital gains rates on part of their compensation. 

Though closing the “carried-interest loophole” is politically attractive, the reality is more complicated. General partners’ share of the profits depend on the investment form, whether that be interest, royalties, long- or short-term capital gains, and dividends. Preferential tax rates are important for PE fund managers because they pass net capital gains to the general partner, limited partners,  and investment managers.

Carried interest only applies to general partners, not limited partners. NYU Professor of Accounting, Taxation, and Business Law Dan Gode notes that “limited partners have capital gains gains income; therefore the carried interest rules try to harmonize the tax treatment for general partners and limited partners.”

See also, After the Pandemic, Will CFOs Continue Working Remotely?

Carried Interest, Then and Now 

Unlike past attempts to curb tax-breaks on the wealthy, it is unlikely that private equity will come out of the American Families Plan entirely unscathed. 

In 2017, the Trump administration also made a bid to tighten the carried-interest restrictions, lengthening the period of time an investment must be held before it ca...