HR-3275-119
Referred to the House Committee on Ways and Means.
Sponsored by Angie Craig (D-MN)
What it does
This bill would make four main changes to the tax code. First, it would create a graduated corporate tax rate, lowering the rate to 18% on the first $400,000 of taxable income for corporations earning under $5 million annually (the current flat rate is 21%). Second, it would recharacterize "carried interest" — the share of investment profits paid to fund managers — as ordinary income rather than capital gains, subjecting it to higher tax rates. Third, it would increase the self-employment tax deduction for individuals earning under $400,000 from 50% to 75% of self-employment taxes paid. Fourth, it would raise the excise tax on corporate stock buybacks from 1% to 1.5%.
Who benefits
Small corporations with taxable income under $5 million, particularly those earning under $400,000, who would pay a lower 18% rate on that income. Self-employed individuals earning under $400,000 annually, who would receive a larger deduction for self-employment taxes paid. The U.S. Treasury, which would collect additional revenue from the carried interest and stock buyback provisions. Workers and communities in industries where investment fund managers currently pay lower capital gains rates on compensation.
Who is hurt
Private equity fund managers, hedge fund managers, and venture capital managers who currently receive carried interest taxed at the lower long-term capital gains rate (20%) and would instead pay ordinary income rates (up to 37%). Publicly traded partnerships holding investment services interests, which face new income recharacterization rules. Corporations that conduct stock buyback programs, which would face a higher 1.5% excise tax. Larger corporations with taxable income over $5 million, which would remain at the flat 21% rate and receive no benefit from the graduated structure. Investment fund managers who use complex partnership structures to defer or reduce tax liability.
Supporters argue
Supporters argue that the carried interest preference allows some of the highest-earning professionals in the country — private equity and hedge fund managers — to pay lower tax rates on their compensation than nurses, teachers, and small business owners pay on their wages. They contend that the bill corrects this disparity by treating compensation for services as ordinary income regardless of how it is structured, while simultaneously reducing the tax burden on small businesses that form the backbone of local economies. The self-employment tax deduction expansion would provide direct relief to millions of freelancers and sole proprietors earning under $400,000, a group that currently bears the full 15.3% self-employment tax burden without employer-side offsets.
Opponents argue
Opponents argue that carried interest represents a return on risk capital, not wages, and that taxing it as ordinary income would reduce incentives for long-term investment in startups, real estate, and other productive assets. They contend that private equity and venture capital funds provide critical financing to businesses that cannot access public markets, and that higher taxes on fund managers would ultimately reduce capital availability and returns for pension funds and university endowments — institutional investors that represent millions of retirees and students. Critics also argue that the stock buyback excise tax increase discourages capital return to shareholders, including retirement account holders, and may reduce overall market liquidity.
Constitutional context
This bill falls squarely within Congress's taxing authority under the Taxing and Spending Clause (Art. I, §8, cl. 1) and the Sixteenth Amendment, which permits income taxes without apportionment. The bill originated in the House, satisfying the Origination Clause (Art. I, §7, cl. 1). The carried interest recharacterization provision taxes income upon realization (when gains are allocated or distributed), avoiding the unresolved realization question left open in Moore v. United States (2024).
Checks and balances
Congress gains revenue authority through new tax rates and recharacterization rules; the IRS and Treasury Department implement and enforce the provisions through regulations, with taxpayers able to challenge specific applications in Tax Court or federal district courts.
Historical precedent
Congress has repeatedly attempted to eliminate the carried interest preference — most recently in the Tax Cuts and Jobs Act of 2017, which extended the holding period requirement to three years but preserved the capital gains rate — without ever fully recharacterizing it as ordinary income at the federal level.