Private equity firms (hedge funds) are compensated in two ways: 2% of the value of the assets they manage and 20% of the fund's profits over a certain point. The I.R.S. characterizes the managers’ cut of the profits as carried interest, which is taxed at the capital gains rate (now 15%) rather than as ordinary income (taxed at 35% for high incomes). It's not been a bad deal for the managers of these firms. Since the end of the recession, private equity has reported record profits, and at least eighteen private-equity executives are estimated to be worth $2 billion or more each.
How much is this loophole costing us?
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