New York Times DealBook: The New Carried Interest Tax Battle, by Andrew Ross Sorkin:

For years, the debate over carried interest — the billions of dollars in profits paid to many kinds of investment executives that is taxed at capital gains rates — has followed a predictable script.

Critics call it an unfair loophole. Private equity and venture capital titans argue that it’s vital to incentivize long-term investment.

But now there is a new clash over the math.

The Budget Lab at Yale recently dropped a bombshell report: Closing the carried interest loophole could rake in an estimated $87.7 billion over a decade. That’s significantly higher than previous projections from nonpartisan congressional scorekeepers.

The Yale team argues that past estimates were too low because they didn’t distinguish between different types of partnership income.

Its estimate is based on access to new data. Instead of looking at overall capital gains, the Budget Lab used academic research that analyzed Schedule K-1 tax form data. This allowed the team to see the specific performance-related distributions that go to general partners, or fund managers, versus funds’ limited partners.

The team found that far more ordinary income was being cloaked as capital gains, and therefore taxed at lower rates, than previously thought.

An industry advocacy group has come out swinging against the Yale report, claiming that its revenue estimate is “a splashy claim. It’s also wrong.”

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