Now to the carried interest question. One of the oldest uses of the partnership is to joint together two partners - one who provides capital and the other services - and then share the profits from the enterprise. The only reason that the tax writing committees are viewing a change in the rule for carried interests is that tax "politics" has replaced tax "policy" - sorry for the timing of your blog. Let's consider a more appealing political group than venture capitalists -- farmers. Phil Farmer has not children to take over his farm so he offers a partnership to Grad Young, a recent college graduate in Agriculture. Because Grad grew up in the city, he had no family support to start in farming. Grad and Phil agree to share all profits 75/25. Some commentators argue that Phil has taxable income on creation of the partnership: if adopted this position would preclude the creation of the partnership as no cash is available to pay the tax. Unfortunately the partnership did not work out and it had to be liquidated. While Phil and Grad operated their partnership, the value of the farmland appreciated by $100,000. In accordance with their agreement, Grad was allocated cash of $25,000 and capital gains of an equal amount. Some commentators believe that Grad ought to have earned income. However, if Grad had not partnered with Phil but rather borrowed the money to start his own farm, he would have had capital gains. So why should he have ordinary income from the partnership? The same is true of the carried interest. IF the GP's borrowed the money and then invested it in the fund businesses, they would have capital gains income rather than service income. A few commentators have focused on this fact and the related fact that the carried interest could be restructured as a non-recourse loan to avoid the proposed carried interest tax changes to suggest that interest should be imputed on the 20% capital represented by the carried interest. Of course, imputing interest at the AFR does not generate much revenue, making the change less attractive politically. The carried interest debate is an example of tax policy only if you agree with Lee Sheppard of Tax Notes that taxing the rich is a tax policy. Just repeal the capital gains differential.