RICHEST PAY TAXES AT A LOW RATE

“In 2006, [Victor] Fleischer, then an untenured professor at U.C.L.A., circulated a research paper, his first on the carried-interest loophole, called ‘Two and Twenty.’ (It was published two years later, in the New York University Law Review.) He argued that the compensation scheme in private-equity firms meant that partners were not taking the kind of risk for which the capital-gains tax was designed. ‘If the fund does well, the managers share in the treasure,’ he wrote. ‘If the fund does badly, however, the manager can walk away.’ He noted that some partners were even taking a portion of their management fees in the form of carried interest, to increase the tax advantage. ‘This quirk in the tax law allows some of the richest workers in the country to pay tax on their labor income at a low rate.’”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.