Congress Must Close the Carried Interest Tax Loophole that Fuels Predation, Not Production
By Oscar Valdés Viera
Few tax loopholes better exemplify how our rigged economy rewards wealth extraction over real work than the carried interest loophole. The controversial loophole exists to benefit some of the wealthiest people on Wall Street—especially private equity executives—at the expense of workers, communities, and the public.
The giant tax loophole for the richest Wall Street firms should be nailed shut once and for all in the coming tax fight. And while Donald Trump has floated eliminating this tax break, House Republicans are already signaling they may side with the private equity industry. Remember, given procedural rules and constraints around federal spending, these tax giveaways to the private equity barons will be paid for by cutting programs that support lower-income families like Medicaid and the Supplemental Nutrition Assistance Program (SNAP).
The carried interest loophole lets private equity managers (among others) claim a huge portion of their income—their share of profits from managing other people’s money—as capital gains instead of ordinary income. That means they get to pay the long-term capital gains tax rate of just 20 percent (which is a lower rate than teachers and firefighters pay), instead of the 37 percent rate that applies to top ordinary incomes.
That is a big windfall, even for super-rich guys. Blackstone’s Stephen Schwarzman (worth over $40 billion) saved over $93 million on taxes from 2019 to 2023 because of the carried interest tax break.
The long-term capital gains tax rate is supposed to reward investors for putting their own money at risk in long-term investments. But private equity managers are taking this tax break on profits made from investing other people’s money—it’s not even their own money at risk. The profits that become carried interest are earned on behalf of investors, like public pension funds. If private equity executives want long-term capital gains tax treatment, they should invest their own money—not just collect a cut for managing someone else’s.
But the injustice isn’t just about tax rates. Carried interest also fuels one of the most dangerous dynamics in the private equity industry: moral hazard. Fund managers are heavily rewarded when deals go well, but face almost no consequences when they go south. With very little of their own capital in the game and the promise of massive tax-advantaged profits if investments go well, managers are incentivized to take outsized risks. That risk-taking doesn’t just jeopardize investors. It puts the target companies, their workers, customers, and their local communities in harm’s way too—from bankrupt retail chains and understaffed nursing homes to surprise layoffs and asset-stripped hospitals.
This misalignment of incentives—high upside gain with little downside risk for private equity firms—encourages reckless strategies that prioritize quick profits over long-term value. Which is exactly the opposite of what the lower capital gains tax rate purportedly encourages, patient long-term capital investments. And thanks to the preferential tax treatment of carried interest, the government is effectively subsidizing risky behavior. It’s a recipe for financial predation, not innovation or economic growth.
The carried interest tax loophole publicly subsidizes a giant payday for Wall Street. So why does this loophole persist, despite being widely recognized as unjust and a driver of tax evasion and rent-seeking? Because it is fiercely protected by one of the most well-funded lobbying machines in Washington. Private equity industry associations have poured millions into lobbying to preserve the loophole. According to Politico, “the American Investment Council, an association of private equity and credit firms, spent $710,000 in the first quarter of 2025 lobbying on policies that include tax treatment for carried interest.”
Even when Trump is considering, at least in theory, supporting legislation to close the loophole, congressional Republicans appear ready, willing, and able to cozy up to the private equity industry to keep the loophole open. Speaker Mike Johnson said “we’ve heard from interest groups around the country, and we want to do right by them.” It is time for Congress to stand up Wall Street. It is unconscionable to slash Medicaid and SNAP and to dismantle the CFPB (which protects people from financial predators) all to preserve big tax giveaways like the carried interest loophole. Congress must close it now.
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