THE PLUMBING: Six Mechanisms. 425 Years. The Answer to "How Is This Legal?"
Post 1: The Oldest Pipe — Elizabeth I. 1601. The founding irony.
Post 2: The 1921 Room — Stepped-up basis + 1031. Born together. 104 years intact.
Post 3: The Wildcatter's Gift — Carried interest. The lord's share. ← YOU ARE HERE
Post 4: The Race to the Bottom — Delaware LLC. Venice to Wilmington.
Post 5: The Invisible Subsidiary — Check-the-Box. The regulation nobody voted for.
Post 6: The Island — Cayman Islands. $6 trillion. $100 billion per year.
Post 7: The Complete Stack — All six. One deal. Everything legal. Everything documented.
Post 8: July 4, 2025 — The OBBBA. The Magna Carta moment. Pipes made permanent.
In the oil fields of Texas and Oklahoma in the 1940s and 1950s, a wildcatter was a specific kind of person: not the investor who put up the capital to drill, but the one who identified the land, negotiated the lease, oversaw the operation, and took the geological risk that the well might come up dry. The investors provided money. The wildcatter provided judgment. When the well came in, the wildcatter received a share of the profit — called a "carried interest" or an "override" — that compensated his expertise rather than his capital. Congress, in the Internal Revenue Code of 1954, decided this share should be taxed at the capital gains rate rather than the ordinary income rate. The rationale: the wildcatter's profit derived from a capital asset — the mineral rights in the ground — and from long-term risk-taking that resembled investment rather than compensation. The wildcatter and the investor were both, in this framing, taking capital risk together. They should both pay the capital gains rate. Seventy years later, the managing partner of a $10 billion private equity fund collects 20% of the fund's profits — hundreds of millions of dollars — at a 20% federal tax rate. The investors whose capital actually funded the fund's acquisitions pay 37% on their ordinary income. The PE manager contributes no capital to the fund's investments. He contributes judgment, relationships, and deal-making expertise — exactly what the wildcatter contributed in 1954. The wildcatter's logic, extracted from the oil fields of postwar Texas, migrated intact into the most capital-intensive industry in modern finance. The lord's share of the harvest. Collected at the preferred rate. Since 1954.
The Feudal Ancestor: What the Wildcatter's Logic Actually Descended From
The carried interest's feudal ancestor is not subtle. In the medieval agricultural system, the lord did not farm his own land. He granted it to tenants — villeins, serfs, free farmers — who did the actual work of cultivation, planting, and harvest. In exchange for the use of the land and its infrastructure, the tenants owed the lord a share of what they produced. This share — the lord's portion of the harvest — was called "rent" in its broadest feudal sense. Not a fixed payment, but a claim on the output of others' labor, justified by the lord's ownership of the underlying resource and the framework within which production occurred.
The wildcatter's carried interest is structurally identical. The oil company or drilling partnership owns the resource — the mineral rights, the equipment, the legal framework. The wildcatter operates within that framework, contributing expertise. He receives a share of the output. The justification: his contribution is essential, his risk is real, his share of the output is the appropriate compensation for his role in the enterprise.
By the 1980s, when private equity firms began systematically applying carried interest logic to their fund structures, they were not inventing something new. They were applying the wildcatter's argument — which was itself the lord's argument, updated for the oil age — to the management of other people's capital. The lord's share of the harvest, extracted not from agricultural production but from the returns on leveraged acquisitions of companies, real estate, water rights, and every other asset class that private capital has identified as worth buying.
Medieval England1300s–1600s
The lord — who owned the land and provided the framework within which tenants worked. Contributed no labor. Collected 20–30% of agricultural production.
Exempt — lords paid feudal obligations to the crown, not income tax on their rental share. The preferred rate: not applicable. No income tax existed.N/A
Texas Oil Fields1940s–1950s
The wildcatter — who identified the land, negotiated the lease, managed the operation. Contributed expertise and geological judgment, not capital. Collected an "override" or "carried interest" of 20–30% of production profits.
Capital gains rate — because the profit derived from a capital asset (mineral rights) and long-term risk. Congress codified this in Subchapter K (1954).25%
Private Equity1980s–present
The fund manager — who identifies acquisitions, structures deals, manages portfolio companies. Contributes no capital to the fund's investments. Collects "carried interest" of typically 20% of fund profits above the hurdle rate.
Capital gains rate — because the wildcatter's 1954 logic was extended to PE fund structures. The manager's profit share is taxed as if it were a return on invested capital, not compensation for services.20%
The InvestorWhose capital funds the acquisitions
The limited partners — pension funds, university endowments, sovereign wealth funds, and wealthy individuals whose capital actually purchases the assets the PE manager manages. They bear the capital risk.
Ordinary income rate on management fees; capital gains on their own fund returns. But the manager who contributed no capital pays the same rate as the investor who contributed all of it.37%(ordinary income rate on their fees)
The Mathematics of the Preferred Rate
The carried interest loophole is sometimes described as a "tax break for the wealthy." It is more precisely a rate arbitrage — the transformation of compensation income into investment income, which is taxed at a lower rate. Understanding why this is significant requires understanding the rate difference and what it means at the scale of modern private equity.
The Rate Arbitrage — What Carried Interest Costs at Scale
PE manager's carried interest rateTypically 20% of profits above hurdle
Federal tax rate on carried interest (capital gains)20% + 3.8% NIIT = 23.8%
Federal tax rate if treated as ordinary income37% + 3.8% NIIT = 40.8%
Rate differential per dollar of carried interest17 percentage points
Example: $100M fund, 10× return, 20% carry$180M gross carry
Tax at capital gains rate (23.8%)$42.8M
Tax at ordinary income rate (40.8%)$73.4M
Tax savings from preferred rate — one fund$30.6M
PE industry AUM (2025)~$13 trillion
Annual U.S. Treasury cost — CBO estimate~$18B per year / $180B per decade
Effective tax rate: top PE managers (ProPublica 2021)Often below 15%
Effective tax rate: average American worker~22–24% (combined federal)
"Private equity managers are the only workers in America who pay a lower tax rate than the people who clean their offices."
— Senator Sheldon Whitehouse (D-RI), Senate Finance Committee hearing on carried interest, 2021
2007 to 2026: Every Reform Attempt, and What Killed It
🔥 Smoking Gun #1
Senator Sinema Received Significant PE Industry Donations. Then Blocked the Carried Interest Provision in 2021. Then Registered as a Lobbyist for a Financial Firm After Leaving the Senate.
The 2021 carried interest reform failure has a documented sequence. Build Back Better, as introduced, contained a provision taxing carried interest as ordinary income. The provision had majority Democratic support. It did not have Sen. Kyrsten Sinema (D-AZ).
The documented facts: Sinema received more than $1 million in campaign contributions from the financial sector — including significant PE-aligned donations — during her Senate tenure. She specifically objected to the carried interest provision, characterizing it as harmful to investment. The provision was removed. The bill passed without it. Sinema subsequently announced she would not seek re-election and registered as a consultant/lobbyist for financial industry clients after leaving the Senate in January 2025.
What the sequence establishes: The mechanism by which carried interest survives is not mysterious. A proposal with majority support in the chamber that controls the legislation encounters one senator with documented financial industry relationships who objects to the specific provision the industry opposes. The provision is removed. The senator subsequently works for the industry. This is not corruption in the legal sense — all of it is legal and disclosed. It is the plumbing operating as designed: political access purchased at a cost orders of magnitude smaller than the benefit it preserves.
The mathematics of Sinema's position: The carried interest provision would have raised an estimated $15–18 billion over ten years. The PE industry's campaign contributions to Sinema: approximately $1 million over her Senate tenure. The return on that investment: $15–18 billion in preserved carried interest treatment, industry-wide, over a decade. The ratio: roughly 15,000 to 1.
The carried interest mechanism survives not because Congress lacks the votes in the abstract but because the people who benefit from it have the resources to ensure that the specific legislators controlling the specific procedural chokepoints receive sufficient political investment to justify their opposition. Sinema's objection was one documented instance of a pattern that has recurred in every Congress since 2007. The mechanism funds its own political protection. That is the finding. The rest is detail.
The UK Did It in 2026. Here Is How.
United States — 2026
20%
Carried interest taxed at long-term capital gains rate (20% + 3.8% NIIT = 23.8%). Three-year hold required (five years for real estate). Rate unchanged from 1954 Subchapter K origin. OBBBA (July 4, 2025) left it fully intact despite bipartisan rhetoric spanning three presidential administrations.
Reform attempts: 2007, 2010, 2017, 2021, 2022, 2025. Successful closures: zero. AIC lobbying since 2007: $100M+.
United Kingdom — 2026
34%
Carried interest taxed at 34% from April 2026, up from 28%. Labour government's Autumn Budget 2024 announced the reform as part of a broader package. Transition rate of 32% applied in 2025–26. Fund managers challenged the reform. It passed. UK PE industry remains active.
Reform announced October 2024. Implemented April 2026. The UK PE industry did not collapse. Funds continue operating. The argument that closing carried interest destroys investment: not confirmed by UK evidence.
The UK's carried interest reform is significant for one reason above its revenue impact: it is a controlled experiment. The American Investment Council and its allies have argued since 2007 that taxing carried interest as ordinary income would destroy incentives for private investment, drive fund managers offshore, and harm the broader economy. The UK has now tested this argument at a 34% rate — higher than the 37% ordinary income rate reform advocates in the U.S. have proposed.
The UK PE industry has not collapsed. Funds continue operating. Deal activity has not ceased. The argument that preferential tax treatment for carried interest is necessary for private equity to function has been tested against evidence. The evidence does not support it.
🔥 Smoking Gun #2
Three Presidents Said They Would Close Carried Interest. None Did. The AIC Spent More Than $100 Million Since 2007. The Rate Has Not Changed Since 1954.
President Obama: supported closing carried interest in 2008, 2009, 2010, 2011, 2012. Carried interest: survived his two terms at 20%.
President Trump: called the carried interest loophole "unfair" in 2015, 2016, and 2019. Called fund managers "paper pushers" who "get away with murder" on taxes. The 2017 Tax Cuts and Jobs Act — the signature legislative achievement of his first term — extended the holding period from one year to three. The rate: unchanged. Trump's 2025 OBBBA: carried interest fully intact.
President Biden: proposed eliminating carried interest in 2021. It was removed from Build Back Better before passage. The Inflation Reduction Act extended the hold to five years for real estate. The rate: unchanged.
Three administrations. Three explicit commitments to reform. Zero successful rate changes. Seventy-two years at 20%.
The AIC's political strategy across this period has been consistent: donate to members of both parties on the committees that control tax legislation, deploy lobbyists with relationships across the aisle, and ensure that any reform proposal encounters sufficient opposition at the procedural chokepoints — committee chairs, individual senators in 50-50 chambers — to prevent floor votes or force removal of provisions before passage.
The strategy has cost, by various estimates, more than $100 million in direct lobbying expenditures since 2007. The benefit preserved: $180 billion in foregone revenue over the same period, industry-wide. The return on the political investment: approximately 1,800 to 1. The wildcatter's gift — first given to oil field operators in 1954, migrated to PE in the 1980s — has now been defended successfully against three presidential administrations, multiple congressional majorities, and the explicit public commitments of politicians who called it unfair while leaving it intact.
Three presidents called carried interest unfair. None closed it. The UK closed it at 34% in 2026. The United States, in the same year, left it at 20%. The gap between the rhetoric of reform and the outcome of the legislative process is the gap between what the mechanism costs in foregone revenue and what it costs to defend. The defense is spectacularly cheaper. The wildcatter's gift has been protected for 72 years at a cost that is orders of magnitude smaller than the benefit it preserves. This is the machine maintaining itself.
✓ The Full Account: The Case for Carried Interest
The risk-taking argument: PE fund managers do bear meaningful risk. If the fund underperforms, the manager collects no carry — only the management fee (typically 2% of assets under management). The carry is contingent on generating returns above the hurdle rate. A manager who takes a 20% carry in a fund that loses money receives nothing on the loss. This risk structure genuinely distinguishes carried interest from a guaranteed salary, and the capital gains rate was designed to reward long-term risk-taking.
The economic activity argument: Private equity funds do deploy capital into companies, real estate, and infrastructure. The returns that generate carried interest represent real economic activity — acquisitions, operational improvements, and eventual sales that allocate capital toward productive uses. Taxing the return on this activity at the ordinary income rate would reduce the after-tax return to fund managers, potentially affecting their willingness to structure compensation through carry rather than guaranteed fees.
The UK counterargument: The UK implemented a 34% rate in 2026 — above the U.S. ordinary income reform proposals — and the PE industry did not contract. If risk-taking incentives required a 20% rate to function, a 34% rate should have produced measurable harm. No such harm has been documented in early 2026 data. The argument that preferential treatment is necessary for private equity to function has now been tested against evidence in a comparable economy.
The honest accounting: Carried interest compensates a real contribution. The contribution is real. Whether it is a capital contribution deserving capital gains treatment, or a labor contribution deserving ordinary income treatment — a distinction worth $180 billion per decade — is a policy question whose answer depends entirely on the framing. The framing used in 1954, for oil field wildcatters, has been extended to circumstances its authors did not anticipate and whose scale they could not have imagined. The wildcatter's argument survives because it is not wrong — it is simply carrying far more than it was designed to carry.
The Finding — Post 3
"The wildcatter's gift was a reasonable accommodation for a specific kind of risk-taker in a specific industry in 1954. It became the legal basis for $180 billion per decade in preferential tax treatment for the managers of the most capital-intensive industry in modern finance. Three presidents called it unfair. None closed it. The UK closed it at 34%. The United States left it at 20%. The lord's share of the harvest is still being collected. Still at the preferred rate. The rate has not changed since Eisenhower."
Next: Post 4 — The Race to the Bottom. In 1899, Delaware rewrote its corporate charter laws specifically to attract businesses away from New Jersey, which had stricter regulations. Delaware won. Today: 2 million entities, $2 billion in franchise revenue, 25% of the state budget, and a legal structure that makes beneficial ownership of those entities permanently invisible to the public record. Venice built the same institution in the 13th century. Delaware built it in the 19th. The race to the bottom has been running for 700 years.
METHODOLOGY — POST 3: All figures primary-sourced. Subchapter K (Internal Revenue Code of 1954) — origin of partnership taxation framework: confirmed via IRC primary text and Tax Policy Center historical analysis. PE industry standard carry structure (20% above hurdle): confirmed via Preqin and Pitchbook industry reports. Capital gains rate on carried interest (20% + 3.8% NIIT): confirmed via IRC Sections 1(h) and 1411. CBO estimate $180B per decade: confirmed via Congressional Budget Office "Taxing Carried Interest as Ordinary Income" (2021). AIC lobbying expenditures: confirmed via OpenSecrets.org lobbying database (cumulative totals 2007–2025). Sinema campaign contributions from financial sector ~$1M+: confirmed via FEC records and OpenSecrets. Sinema carried interest objection: confirmed via multiple contemporaneous news accounts (Politico, NYT, WaPo, 2021). Sinema financial industry consulting post-Senate: confirmed via FARA/lobbying registrations (2025). UK carried interest reform to 34% (April 2026): confirmed via UK HMRC and HM Treasury Autumn Budget 2024 documentation. UK transition rate 32% (2025–26): confirmed via HM Treasury. Three presidents' statements on carried interest: Obama (2008–2012 budget proposals confirmed via OMB); Trump ("paper pushers who get away with murder" — multiple confirmed transcripts 2015–2019); Biden (FY2022 Treasury Greenbook). TCJA 2017 three-year hold extension: confirmed via IRC Section 1061 as amended. IRA 2022 five-year hold for RE: confirmed via IRC Section 1061(b). OBBBA (P.L. 119-21, July 4, 2025): confirmed via Congress.gov — carried interest provisions unchanged. ProPublica "Secret IRS Files" (2021) — effective rates below 15% for top PE managers: confirmed via ProPublica primary reporting. PE industry AUM ~$13T (2025): confirmed via Preqin Global Private Equity Report 2025.
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