The debate over carried interest goes back decades. Proponents argue that it encourages long-term investment and creates jobs, while others — even in the financial industry — see it as a special break for private funds. The 2017 tax reform bill did not end it but required fund managers to hold underlying investments for at least three years instead of one.
According to a 2018 Congressional Budget Office report on options for reducing the federal deficit, taxing carried interest as ordinary income would raise $14 billion over a decade.
If Mr, Biden prevails, the change would affect hedge funds, private equity funds and venture capital firms.
A statement from the Managed Funds Association said it "appreciates the Biden Administration's efforts to invest in our nation's economic future," and supports "a fair and growth-oriented tax code that promotes long-term investment activity." With hedge funds and alternative investment funds helping to secure the retirement of more than 26 million workers, MFA said, "it's unfortunate that our industry has been singled out by the administration."
Drew Maloney, president and CEO of private equity advocacy group American Investment Council issued a similar statement that supported the goal of rebuilding the economy and creating jobs, and credited private equity investments for supporting businesses and innovation, especially throughout the pandemic, and for making significant investments in the renewable-energy industry. "Instead of moving forward with tax increases that discourage investment in small businesses, workers and innovation, the administration and Congress should deliver policies that will put more private investment to work for families across the country," Mr. Maloney said.
The National Venture Capital Association expressed disappointment in the proposed tax increases on long-term capital gains, including carried interest, warning that it would reduce long-term investment and entrepreneurship by making short-term economic activity relatively more attractive.
NVCA President and CEO Bobby Franklin warned in the statement that it would undercut Mr. Biden's agenda, which "relies on catalyzing long-term private investment activity to solve critical societal challenges such as climate change, access to economic opportunity across regions and in underrepresented communities, and countering the rise of China."
Though venture capitalists "are excited to partner with the administration" on these issues, the proposed tax increases undercut this effort, Mr. Franklin said. "We urge the administration not to take one step forward and two steps back."