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Research report

Goldilocks Meets Private Equity: Taxing Carried Interest Just Right

Donald Marron
October 6, 2016
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Abstract

Controversy rages about how to tax carried interest. One view sees carry as compensation that should be taxed like other labor income. Another sees carry as a reward for financial risk-taking that should be taxed like capital income. A third sees carry as creating a costly tax arbitrage. In this paper, Donald Marron shows how we can reconcile these three views. Current practice taxes carry too little. Treating it as labor income without other reforms taxes it too much. To tax carried interest just right, it should be labor income for managers and deductible against ordinary income for investors.

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Business Taxes Pass-through entities Campaigns, Proposals, and Reforms Current legislative proposals Presidential campaign proposals Individual Taxes Capital gains and dividends High-income households
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  • Donald Marron
    Institute Fellow
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