There Is No Bright Line on Taxing Carried Interest

Senate Democrats dropped a proposed tax increase on carried interest from the Inflation Reduction Act, but the problem isn’t going away — and it’s not going easy. You can tell a story that carried interest should be taxed as ordinary income, as the earlier version of the bill proposed, but only if you ignore the intricacies.

When you work, you earn wages that are taxed as ordinary income – nearly 40% for high-income individuals. If you buy a stock and it goes up, you’ll be taxed at the capital gains rate, typically 20%. Investors are rewarded by the tax code with lower rates because creating new innovations requires risk. There Is No Bright Line on Taxing Carried Interest

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