House bill would end lower tax rate on fund managers' carried interest pay

What does this do?

HR 1091 would require fund managers to pay ordinary income tax rates on carried interest, the share of fund profits they receive as compensation for managing the fund. Under current law, that income is taxed at the lower capital gains rate. The bill would also subject carried interest to self-employment taxes.

Who does it affect?

The bill directly affects general partners and managers at private equity funds, hedge funds, venture capital firms, and similar investment vehicles. Ordinary investors who put money into these funds would not be directly affected.

Why does it matter?

Fund managers who earn profits through their own invested capital, rather than through services rendered, could still qualify for capital gains tax rates. Managers who earn profit shares without putting their own money at risk would instead be taxed at the higher ordinary income rate, and those who attempt to circumvent the new rules would face a 40 percent penalty.

What does it cost, and who pays?

• 40% penalty for evasion attempts
• Affects high-earning fund managers
• Ordinary investors not affected