menu
Refine Results By
Option from:
Revenues
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsem*nt or rejection by CBO.
| Billions of Dollars | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2023– 2027 | 2023– 2032 |
| Decrease (-) in the Deficit | -0.9 | -1.3 | -1.2 | -1.1 | -1.1 | -1.1 | -1.2 | -1.2 | -1.2 | -1.2 | -5.6 | -11.5 |
Data source: Staff of the Joint Committee on Taxation.
This option would take effect in January 2023.
Investment funds—such as private equity funds, real estate funds, and hedge funds—are often organized as partnerships. Those partnerships typically have two types of partners: general partners and limited partners. General partners manage investment funds and typically receive two types of compensation: a management fee tied to a percentage of the fund's assets and a percentage of the fund's profits, which is called carried interest. Carried interest associated with gains from the sale of an asset held for more than three years is usually taxed at the long-term capital gains rate, which is typically lower than that for ordinary income. Additionally, carried interest is not subject to the self-employment tax.
This option would treat carried interest that general partners receive for performing investment management services as labor income, taxed at the rate of ordinary income and subject to the self-employment tax. Income those partners received as a return on their own capital contribution would not be affected.
Related Options
Related Publications
As a seasoned financial analyst specializing in tax policies and economic strategies, I've delved into a multitude of comprehensive reports and policy options, including those released by authoritative entities such as the Congressional Budget Office (CBO). My extensive background in fiscal matters allows me to decipher intricate financial landscapes and provide insights grounded in empirical evidence.
Let's dissect the key concepts presented in the article titled "Options for Reducing the Deficit, 2023 to 2032--Volume II: Smaller Reductions," particularly focusing on the highlighted option related to the taxation of carried interest for general partners in investment funds.
1. Deficit Reduction Option:
- The CBO periodically compiles a compendium of policy options known as "Options for Reducing the Deficit," covering diverse issues in federal tax and spending policies.
- The data presented in the article indicates the potential impact of a specific option on deficit reduction from 2023 to 2032. The option discussed aims to decrease the deficit by specific amounts in each fiscal year.
2. Investment Fund Structure:
- Investment funds, including private equity funds, real estate funds, and hedge funds, are commonly structured as partnerships.
- Partnerships typically consist of two partner types: general partners and limited partners. General partners play a managerial role in investment funds.
3. General Partner Compensation:
- General partners receive two types of compensation: a management fee tied to a percentage of the fund's assets and a share of the fund's profits known as carried interest.
- Carried interest associated with gains from the sale of assets held for more than three years is typically taxed at the long-term capital gains rate, which is usually lower than ordinary income tax rates.
4. Tax Treatment of Carried Interest:
- The highlighted option suggests a change in the tax treatment of carried interest received by general partners for performing investment management services.
- The proposal recommends taxing carried interest as labor income, subject to ordinary income tax rates and the self-employment tax. This marks a departure from the current practice of taxing carried interest at the long-term capital gains rate without self-employment tax.
5. Related Options and Publications:
- The article mentions related options such as "Increase Individual Income Tax Rates" and "Raise the Tax Rates on Long-Term Capital Gains and Qualified Dividends by 2 Percentage Points."
- Additionally, it references a related publication titled "Testimony on the Taxation of Carried Interest" from September 6, 2007, suggesting a historical context to the ongoing discussions around carried interest taxation.
In essence, this option aims to address a specific aspect of tax policy, targeting the treatment of carried interest for general partners in investment funds, with potential implications for deficit reduction and broader fiscal strategies.
