Saturday, January 17, 2026

The Private Equity Playbook Part 5: The Loophole How Private Equity Partners Pay 20% Tax on Billions While Teachers Pay 22% on $60,000—And Why $100 Million in Lobbying Has Killed Every Reform for 18 Years

The Private Equity Playbook Part 5: The Loophole

The Private Equity Playbook Part 5: The Loophole

How Private Equity Partners Pay 20% Tax on Billions While Teachers Pay 22% on $60,000—And Why $100 Million in Lobbying Has Killed Every Reform for 18 Years

Sarah is a public school teacher in Ohio. She makes $55,000 per year. She pays 22% federal income tax—$12,100. David is a private equity partner in New York. He made $50 million last year managing a fund. He pays 20% federal income tax—$10 million. How is this possible? Because of a tax loophole called "carried interest." When PE partners earn their share of fund profits—typically 20% of all gains—the IRS treats it as a capital gain, not ordinary income. Capital gains are taxed at 20% (or 23.8% with the net investment income tax). Ordinary income at that level is taxed at 37%. This loophole costs the federal government approximately $18 billion over 10 years. It benefits roughly 3,000 private equity and hedge fund partners—almost exclusively wealthy, white men. And despite bipartisan support for reform—Donald Trump campaigned on ending it, Democrats have written multiple bills to close it—every attempt has failed. Why? Because the private equity industry has spent more than $100 million lobbying to protect it. In 2022, when Democrats came closest to closing the loophole in the Inflation Reduction Act, Senator Kyrsten Sinema single-handedly killed the provision after receiving $2.2 million in campaign contributions from private equity and hedge funds. The playbook extracts wealth from workers, patients, and tenants. The loophole ensures PE partners keep that wealth. And the lobbying machine guarantees nothing changes.

What Is Carried Interest?

The Legal Definition

Carried interest is the share of investment profits that private equity and hedge fund managers receive as compensation. Typically, this is 20% of all profits above a certain threshold.

Here's how it works:

A private equity firm raises $1 billion from investors (pension funds, university endowments, wealthy individuals). The firm invests that money in companies. After several years, they sell those investments for $2 billion—a $1 billion profit.

The profit distribution:

Investors get 80%: $800 million
PE partners get 20%: $200 million (this is the "carried interest")

Additionally, PE firms charge a management fee (typically 2% of assets per year). On a $1 billion fund, that's $20 million annually in fees—taxed as ordinary income.

But the carried interest—the $200 million in profit share—is taxed as a long-term capital gain at 20%, not as ordinary income at 37%.

CARRIED INTEREST TAX TREATMENT:

WHAT IT IS:
• PE/hedge fund managers' share of investment profits
• Typically 20% of gains above a threshold
• Can be hundreds of millions per partner per year

HOW IT'S TAXED:
• Long-term capital gains rate: 20%
• Plus net investment income tax: 3.8%
• Total effective rate: 23.8%

HOW IT SHOULD BE TAXED (CRITICS ARGUE):
• Ordinary income rate for high earners: 37%
• Plus net investment income tax: 3.8%
• Total rate: 40.8%

THE DIFFERENCE:
• On $50 million: saves $8.5 million in taxes
• On $100 million: saves $17 million in taxes

The Argument For Carried Interest Treatment

The private equity industry argues that carried interest should be taxed as capital gains because:

PE partners are investing their time and expertise (their "sweat equity")
They take on risk—if the fund loses money, they get nothing
Capital gains tax rates are designed to encourage investment
This is how all investment partnerships work

According to the American Action Forum, "Carried interest represents a return on the general partner's human capital investment in the fund."

The Argument Against (Why It's a Loophole)

Critics—including economists, tax policy experts, and both progressive and conservative politicians—argue that carried interest is compensation for work, not a return on capital investment:

PE partners invest very little of their own money: In a typical fund, partners contribute 1-3% of total capital. The other 97-99% comes from outside investors.
This is their job: Managing investments is what PE partners do for a living. It's labor income, not passive investment returns.
No real risk: PE partners also earn guaranteed management fees (2% of assets). Even if carried interest is zero, they're paid millions.
Other professionals don't get this treatment: Corporate executives, lawyers, consultants who get performance bonuses pay ordinary income tax. Only PE/hedge fund managers get capital gains treatment.

As the Center for American Progress notes, "If carried interest were truly a return on invested capital, PE managers would have to put up their own money at risk. They don't."

THE COMPARISON EVERYONE CITES:

A teacher making $55,000:
• Federal income tax rate: 22%
• Actual tax owed: ~$12,100

A PE partner making $50,000,000:
• Carried interest taxed as capital gains: 20%
• Actual tax owed: ~$10,000,000

If taxed as ordinary income:
• Tax rate: 37%
• Tax owed: ~$18,500,000
• Difference: $8,500,000 saved

The teacher pays a HIGHER marginal rate than the PE billionaire.

The Cost: $18 Billion Over 10 Years

The Revenue Loss

According to the Joint Committee on Taxation, closing the carried interest loophole would raise approximately $14-18 billion in tax revenue over 10 years.

That's an average of $1.4-1.8 billion per year in lost tax revenue—money that could fund:

Teacher salaries
Infrastructure repairs
Healthcare programs
Veteran benefits
Deficit reduction

Instead, it goes to roughly 3,000 private equity and hedge fund partners.

Who Benefits?

The beneficiaries of carried interest are not a broad or diverse group. According to research, they are:

Approximately 3,000 individuals (mostly PE and hedge fund partners)
Overwhelmingly male (95%+)
Overwhelmingly white
Concentrated in New York, Connecticut, California, and Texas
Earning millions to hundreds of millions per year

This is not a middle-class tax break. This is a tax preference for the ultra-wealthy.

The Reform Attempts: 18 Years of Failure

The Timeline of Failed Reforms

Since 2007, there have been multiple serious attempts to close or limit the carried interest loophole. Every single one has failed.

TIMELINE OF FAILED CARRIED INTEREST REFORMS:

2007-2008: House Democrats pass bill to close loophole. Senate blocks it.

2010: Dodd-Frank financial reform legislation. Carried interest provision stripped out.

2015-2016: Presidential campaigns. Trump, Clinton, Sanders all call for ending it. Nothing happens.

2017: Trump's tax bill (Tax Cuts and Jobs Act). Loophole survives with minor tweak (holding period increased from 1 to 3 years).

2021: Biden's Build Back Better Act includes carried interest reform. Killed by Senator Kyrsten Sinema.

2022: Inflation Reduction Act (IRA). Democrats' last chance. Sinema kills it again.

2024-2025: No serious reform attempts. Loophole remains.

2017: Trump's Tax Bill (The Fake Reform)

Donald Trump campaigned explicitly on ending carried interest. He called it a tax break for "hedge fund guys getting away with murder."

When Republicans controlled the House, Senate, and White House in 2017, they had the power to end it. But the final tax bill left the loophole almost entirely intact.

The only change: the holding period for capital gains treatment increased from one year to three years. This meant PE funds had to hold investments for three years instead of one to get the favorable tax rate.

But most PE investments are held for 3-7 years anyway. The change was cosmetic.

Trump later admitted, "I tried. We couldn't get it."

Translation: The lobbying was too strong.

2021-2022: Kyrsten Sinema Kills Reform Twice

In 2021, Democrats controlled the House, Senate (by the slimmest margin), and White House. President Biden's Build Back Better Act included a provision to close the carried interest loophole.

Senator Kyrsten Sinema of Arizona demanded the provision be removed. She refused to vote for the bill unless carried interest was protected. The provision was stripped out.

In 2022, Democrats made one more attempt in the Inflation Reduction Act. Again, Sinema killed the carried interest reform.

Why?

KYRSTEN SINEMA'S CAMPAIGN CONTRIBUTIONS:

PRIVATE EQUITY & HEDGE FUND DONATIONS (2018-2024):
• Total raised: $2.2 million+
• Blackstone employees: Major donors
• KKR employees: Major donors
• Apollo employees: Major donors

LOBBYING BY PE INDUSTRY:
• $110 million spent on lobbying (2021-2022)
• American Investment Council (PE lobby group) led efforts
• Targeted Sinema specifically

RESULT:
• Carried interest reform stripped from IRA
• Loophole survives
• Sinema retires in 2024 (doesn't seek re-election)

According to The New York Times, Sinema received more money from private equity and hedge funds than any other industry sector during her time in the Senate. After blocking carried interest reform, she announced she would not seek re-election in 2024.

The Lobbying Machine

How Much the Industry Spends

The private equity industry has spent more than $100 million lobbying Congress since 2007 to protect carried interest and fight regulation.

PE INDUSTRY LOBBYING (2007-2024):

TOTAL SPENT: $100+ million

MAJOR YEARS:
• 2021-2022: $110 million (fighting IRA carried interest reform)
• 2017: Heavy lobbying during Trump tax bill
• 2010: Heavy lobbying during Dodd-Frank

KEY LOBBY GROUPS:
• American Investment Council (main PE trade group)
• Private Equity Growth Capital Council (merged with AIC)
• Individual firms: Blackstone, KKR, Carlyle, Apollo

LOBBYING TACTICS:
• Direct campaign contributions
• Industry-funded "research" claiming economic benefits
• Revolving door (hiring former members of Congress)
• Grassroots campaigns (funding fake "coalition" groups)

The Arguments They Use

When lobbying against carried interest reform, the PE industry makes several claims:

1. "It will hurt small businesses and startups."

This is misleading. Carried interest reform targets multi-million-dollar PE and hedge fund managers, not angel investors or small venture capital funds. Most reform proposals include exemptions for funds under a certain size.

2. "PE creates jobs and grows the economy."

We've already documented in Part 4 that PE buyouts result in 4.4-16% job losses and that PE companies are 10x more likely to go bankrupt. The "job creation" claim is industry propaganda.

3. "Closing the loophole won't raise much revenue."

The Joint Committee on Taxation estimates $14-18 billion over 10 years. While this won't solve the deficit alone, it's significant—and it's a matter of basic fairness.

4. "Other countries allow similar treatment."

Some do, some don't. But this is irrelevant to whether the policy is fair or economically sound.

The Revolving Door

One of the PE industry's most effective lobbying tactics is hiring former members of Congress and their staff.

Examples:

Former Senate Majority Leader Trent Lott: Lobbied for PE firms after leaving Congress
Former Senator John Breaux: Lobbied for PE after leaving Congress
Former Treasury officials: Multiple have joined PE lobby groups

When lawmakers know they can earn seven-figure salaries lobbying for PE after leaving office, they're less likely to support reforms that hurt the industry.

Why Reform Always Fails

The Narrow Coalition

Closing the carried interest loophole benefits:

The federal treasury ($14-18 billion over 10 years)
Taxpayers generally (more revenue = less deficit or more services)
Fairness/equity (high earners pay the same rates as other high earners)

But it harms a very small, very wealthy, very concentrated group of people who can afford to spend millions lobbying.

The beneficiaries (taxpayers, fairness advocates) are diffuse and disorganized. The opponents (3,000 PE partners) are concentrated and highly motivated. This is a classic case of concentrated benefits defeating diffuse costs.

Campaign Finance

PE firms and their partners donate heavily to both parties:

Republicans receive significant PE donations
Democrats receive significant PE donations (especially from Wall Street-friendly moderates)

This creates a bipartisan incentive to protect the loophole. Even politicians who publicly support reform often quietly undermine it.

Kyrsten Sinema is the most obvious example, but she's not alone. Multiple Democrats and Republicans have received PE money and then voted to preserve carried interest.

The "Deficit Hawk" Excuse

Ironically, some members of Congress who oppose closing carried interest cite "deficit concerns" when asked about other spending.

The logic is absurd: we can't afford healthcare, education, or infrastructure, but we can afford to give PE billionaires a $1.8 billion annual tax break?

This reveals the priorities: tax breaks for the ultra-wealthy are untouchable. Everything else is negotiable.

The Bigger Picture: How the System Is Rigged

Carried Interest Is Just One Piece

Carried interest is not the only tax advantage PE firms exploit:

1. Interest Deductions: When PE firms load companies with debt, those companies deduct the interest payments from taxable income. This reduces corporate tax revenue while increasing leverage.

2. Depreciation: PE firms can accelerate depreciation on assets, reducing taxable income further.

3. Offshore Structures: Some PE firms route investments through low-tax jurisdictions (Cayman Islands, Bermuda) to minimize taxes.

4. Estate Planning: PE partners use trusts, GRATs, and other tools to pass wealth to heirs with minimal estate taxes.

Carried interest is just the most visible and indefensible loophole. The entire tax code is tilted in favor of financial engineering over productive work.

Why This Matters

We've now documented:

Part 1: The playbook (how PE extracts wealth via debt and fees)
Part 2: Healthcare (20,150 deaths, surprise billing)
Part 3: Housing (millions displaced, 45% rent increases)
Part 4: The cost (110 bankruptcies, 18% wage cuts, systemic harm)
Part 5: The loophole (how extraction is tax-advantaged)

The pattern is clear:

PE firms buy companies with debt
They extract fees and cut costs
Workers lose jobs and wages
Patients die from quality cuts
Tenants are evicted and displaced
Companies go bankrupt at 10x the normal rate
And the PE partners pay lower tax rates than teachers

This isn't capitalism. This is a rigged system designed to transfer wealth upward while insulating the beneficiaries from consequences.

Private equity partners pay 20% tax on billions in income. Teachers pay 22% on $55,000. This loophole costs taxpayers $18 billion over 10 years and benefits roughly 3,000 people. Donald Trump campaigned on ending it and failed. Democrats wrote bills to close it and were blocked by Kyrsten Sinema—who received $2.2 million from the PE industry. The industry has spent $100+ million lobbying to protect the loophole, and every reform attempt since 2007 has failed. This is how the system is rigged. The playbook extracts wealth from workers, patients, and tenants. The loophole ensures PE partners keep that wealth at preferential tax rates. And the lobbying machine guarantees nothing changes. In Part 6, we'll close the loop. We'll show who funds private equity—where the $5 trillion in assets actually comes from. And we'll connect this entire series back to The Vault: how family offices invest 21-27% of their wealth in private equity, creating a cycle where extraction becomes accumulation becomes reinvestment in more extraction. The machine is complete. And now you understand how it works.

NEXT IN THE SERIES: Part 6 examines who actually funds private equity and where the extracted wealth ultimately goes. We'll show how family offices—the 8,030 private wealth firms managing $5.5 trillion for the ultra-rich—invest 21-27% of their assets in PE funds. This creates a closed loop: PE extracts wealth from the real economy, family offices accumulate that wealth tax-free, and then reinvest it in more PE funds to extract more wealth. The final piece connects The Vault series to The Private Equity Playbook: this is how generational wealth perpetuates itself. Extraction → accumulation → dynasty. The system is complete.

Sources & Further Reading

Disclaimer: This article presents analysis of tax policy, campaign finance records, and lobbying disclosures based on publicly available data. Tax revenue estimates are from the Joint Committee on Taxation and other official sources. Campaign contribution data is from Federal Election Commission records and investigative journalism. This is educational content about tax policy, not tax, financial, or legal advice.

the gipster

Saturday, January 17, 2026