Carried interest began with 16th century European ship captains who took a 20 percent cut of the profit on the goods they carried across the ocean. Today it is the share of profits paid to the general partners of private equity, hedge and venture capital funds. Most funds also charge a yearly management fee of 1 to 2 percent of assets, taxed as ordinary income, while carry flows through a distribution waterfall: return of principal, a hurdle rate of about 7 to 9 percent, a catch-up phase and an 80 to 20 split. Flagship funds at firms such as Bain Capital and Providence Equity Partners have charged supercarry above 20 percent, and performance fees have reached 44 percent.

Carry is taxed as a long-term capital gain at up to 23.8 percent, against 37 percent for top ordinary income, a treatment rooted in the sweat equity of early 20th century oil wildcatters and affirmed by the IRS in 1993. In the UK, a 2007 uproar over office cleaners paying higher rates than private equity executives led to an 18 percent capital gains rate, but carry kept its status. In the U.S., Sander Levin, the Obama budgets, Dave Camp and Hillary Clinton all targeted carry. The 2018 Tax Cuts and Jobs Act added a three-year holding period, and a 2022 Inflation Reduction Act provision was dropped.

• Agreements in 1987 and 2003 between the Inland Revenue and the British Venture Capital Association taxed UK carry at around 10 percent.
• Mitt Romney’s released tax returns showed 31 percent of two years of income came from carried interest.
• Republican Dave Camp, chair of House Ways and Means, drafted a 35 percent rate to help pay for lower corporate taxes.
• The 2018 law carved out large parts of the real estate sector from the tighter rules.
• The 2022 provision was reportedly removed at the insistence of Senator Kyrsten Sinema.