The Joint Economic Committee has published a new research report, Carried Interests, Taxation, and Entrepreneurship (#110-14). Here is the abstract:

This report examines the recent controversy about the taxation of the carried interests of general partners in hedge funds and private equity funds. Some policymakers have contended that the general partners in hedge funds and private equity funds are unfairly using certain provisions of the federal tax code and related IRS regulations and interpretations to defer recognition of and lower the effective tax rate on the compensation paid to general partners from these funds. This occurs because some of the compensation comes from long-term capital gains.

However, these carried interest tax provisions encourage entrepreneurship by facilitating the pooling of capital and highly skilled labor in partnerships. Any tax code change designed to repeal these tax provisions may inadvertently damage small business formation, hamper the restructuring of ailing corporations, and slow economic growth.