Really feel kind of stupid that I had never heard of this before the past Sunday presidential debate. After googling and gaining some understanding of the concept/tax loophole I am simply amazed at how the tax code favors those in the upper brackets.
Wait a minute - isn't that a contradictory statement? If the tax code favored them, they would not be in the upper brackets! The upper brackets is a 'penalty' of sorts (side note - for the record, I'm in favor of a progressive tax rate).
OK, so I don't know much about carried interest, though I do know about many of the things mentioned (marginal versus effective tax rate, deduction versus credit, plus cap gains rates, loss carry forward, etc), and I do think that many/most people have no clue on those topics.
But a quick search shows:
What is carried interest, and how should it be taxed? | Tax Policy Center
Carried interest is a contractual right that entitles the general partner of a private investment fund (often a private equity fund) to share in the fund’s profits (figure 1). A fund typically uses the carried interest to pass through its net capital gains to the general partner which, in turn, passes the gains on to the investment managers. The managers pay a federal personal income tax on these gains at a rate of 23.8 percent (20 percent tax on net capital gains plus 3.8 percent investment tax).
If I read that right, it is cap gains flowing through as cap gains. So what's wrong with them being taxed at cap gains rate? It sounds a lot like the cap gains distribution many of us get from a mutual fund. Are we, mere mortals, being 'favored'?
BTW, another 'advantage' often sited is the 'preferential' treatment of long term (>1 year) cap gains (lower than earned income). However, we had a discussion on that a few years back, and demonstrated how sometimes the cap gain rate is actually a penalty. Short story, if you had a long term cap gain of say, 10%, but you bought the investment 20 years ao, you actually lost out to inflation. It's not the same at all as a 10% gain that is 1 year and one day old, but it is taxed the same. You should be able to factor in an inflation adjustment, and take it as a loss against other gains (or carry it forward against future gains, as our tax laws permit, and is only sensical under these rules).
-ERD50