As Congress moves closer to considering the extension of the Tax Cuts and Jobs Act (TCJA), there are myriad proposals being considered to be used as a “pay for” as an offset for the tax cuts.  Among those ideas is changing the tax treatment of carried interest, which Citizens Against Government Waste has long opposed.

Carried interest is used to compensate general partners of private equity, real estate, and venture capitals firms.  It rewards performance because payments are based on the return on investment and taxed as capital gains instead of ordinary income.  The tax treatment of carried interest is not a “loophole” as its opponents contend.  It is a 100-year-old pro-growth tax code provision that incentivizes risk-taking and entrepreneurship, benefiting investors, public pension funds, and retirees.

Efforts to increase the tax rate on carried interest include the misnamed “Carried Interest Fairness Act,” introduced as H.R. 1091 in the House of Representatives and S. 445 in the Senate, which would increase the tax rate on carried interest investment by 70 percent, from 23.8 percent to 40.8 percent.  The bill would raise taxes by an estimated $6.5 billion over the next decade, or an average of $650 million annually.  It is not only unfair to change the tax treatment of carried interest after it has been in effect and been effective for such a long time but also not worth the impact it will have on economic growth through reduced investment and productivity.  In a February 19, 2025, coalition letter, 19 organizations including the Council for Citizens Against Government Waste urged Congress to oppose the legislation and “similar proposals that would raise taxes on carried interest investment income.”

The TCJA set the appropriate rate for carried interest and since then, private equity invested more than $5 trillion into the economy, 85 percent of which was in support of small businesses.  If the Carried Interest Fairness Act is signed into law, the U.S. would drop from the third lowest tax rate for carried interest to the third highest rate and there would be a significant chilling effect on investment in American businesses. 

The Trump administration is reducing regulations, pushing for an extension of the TCJA, and making the government more efficient and less wasteful.  It makes no sense to counteract those pro-growth policies by increasing taxes on carried interest.