The cost to taxpayers is $1.4 billion a year
Private equity, hedge funds and investment funds are made up of two different kind of partners, general partners, who put the investment group together and have all the authority to direct the investments of the group and limited partners who are the ones that put in the bulk of the money but have no say in what investments the general partners participate in.
General partners are usually paid a management fee of 2% of the total assets of the fund, and then 20% of the profits the partners are able to earn. The 2% management fee is counted as regular wages and is taxed accordingly. While the 20% profit gain, if held longer than 3 years is taxed at the capital gains rate, generally about 20% versus the top bracket which is now 37%.
As carried interest is taxed like capital gains it is not subject to payroll taxes, the most relevant would be the 2.9% Medicare tax and also the .9% Medicare tax that applies to income over the statutory levels. Taxing this as payroll would help shore up our Medicare Trust Funds.
To give you an idea of how much money we’re talking about, in 2019, the top 8 earned between $1.1 billion and $1.8 billion for the year.