John O’Farrell, a partner at venture capital firm Andreessen Horowitz, says he believes carried interest is essentially compensation for doing work, managing investments and generating returns; therefore, it should be treated as ordinary income.
“I’ve argued for more than 15 years that carried interest is a fee for service, and thus should be taxed as ordinary income. Many of you vociferously disagree (some sincerely, some selfishly). I agree,” the executive wrote on X.
A new report from The Budget Lab at Yale argues that the U.S. has been significantly underestimating how much tax revenue could be generated by closing the carried interest “loophole,” which allows many private equity and venture capital managers to pay lower capital gains tax rates on compensation that critics say should be taxed as ordinary income.
IRS data and new academic research have now made it possible to better estimate the size of carried interest income.
“The results indicate that previous estimates did, in fact, substantially undercount how much revenue could be gained from reforming carried interest taxation,” the report stated.
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