Congress Needs to Close the Carried Interest Loophole

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In recent days Senate Minority Leader Mitch McConnell (R-KY) and House Speaker John Boehner (R-OH) have both suggested that they might be willing to allow some tax cuts for high-income individuals to expire. But Sen. McConnell—and evidently Rep. Boehner, as well—are reportedly still insisting that the Bush tax cuts on investment income be extended.

The Republican leaders’ willingness to discuss top tax rates is a welcome step forward. But until policymakers address the gap between tax rates on ordinary income (income from wages, salaries, and so on) and the tax rates on investment income (capital gains and dividends), they will not have fully addressed the fundamental unfairness in the tax code.

No tax policy better illustrates this unfairness than the tax treatment of “carried interest”—a loophole that some of the wealthiest people in the country use to take advantage of the special low tax rates on capital gains. Closing the carried interest loophole should be a part of any significant deficit-reduction or tax-reform effort.