S-4330-119
Read twice and referred to the Committee on Finance.
Sponsored by Ron Wyden (D-OR)
What it does
This bill would change how "carried interest" — the share of investment profits paid to private equity, hedge fund, and venture capital managers — is taxed. Currently, those profits are often taxed at the lower long-term capital gains rate. The bill would require fund managers to include a calculated "deemed compensation amount" in their ordinary income each year, taxed at the higher ordinary income rate. It would also repeal the existing Section 1061 three-year holding period rule, replacing it with this new framework.
Who benefits
The U.S. Treasury and federal government, which would collect additional tax revenue. Wage and salary earners who pay ordinary income tax rates on their compensation and would no longer face a structural tax rate disparity with investment fund managers. Small business owners and self-employed individuals taxed at ordinary rates on their service income. Lawmakers seeking to reduce the federal deficit. Indirectly, any programs funded by increased federal revenue.
Who is hurt
Private equity fund managers, hedge fund managers, venture capital managers, and real estate fund managers who currently benefit from capital gains treatment on carried interest. Investment partnerships broadly, which would face new reporting and compliance obligations. Tax attorneys and accountants who have built practices around existing carried interest structures may see those services disrupted. Pension funds and university endowments that invest in private equity could face indirect effects if fund managers restructure fee arrangements in response. Startup ecosystems that rely on venture capital could be affected if fund economics shift.
Supporters argue
Supporters argue that carried interest represents compensation for services rendered — fund managers do not contribute the underlying capital — and that taxing it at preferential capital gains rates creates an inequity where a hedge fund manager pays a lower marginal rate than a nurse or teacher. They contend the existing tax treatment costs the federal government an estimated $14–18 billion over ten years according to Joint Committee on Taxation estimates, and that closing this gap is a straightforward matter of tax fairness: income earned through labor should be taxed as labor income regardless of how it is structured contractually.
Opponents argue
Opponents argue that carried interest is a legitimate return on risk-bearing and deferred compensation, not a simple wage — fund managers typically receive carried interest only if investments exceed a hurdle rate, meaning they bear real downside risk. They contend that reclassifying it as ordinary income would reduce incentives for long-term investment, potentially shrinking the pool of capital available to startups and growing businesses, and that the revenue gain is modest relative to the economic disruption. They also argue the bill's complex "deemed compensation" formula creates significant administrative burdens and valuation uncertainty for partnerships of all sizes.
Constitutional context
The Taxing and Spending Clause (Art. I, §8, cl. 1) grants Congress broad authority to lay and collect taxes, and the Sixteenth Amendment permits taxation of income without apportionment. Because this bill taxes income already realized through partnership allocations and distributions, it does not raise the unresolved realization question left open in Moore v. United States (2024). The Origination Clause (Art. I, §7, cl. 1) requires revenue bills to originate in the House; this bill was introduced in the Senate, which could be a procedural vulnerability if it advances.
Checks and balances
Congress gains authority to redefine the tax character of partnership income; the IRS and Treasury would gain significant rulemaking discretion under the bill's broad regulatory delegation, subject to judicial review and congressional oversight.
Historical precedent
Congress enacted Section 1061 in the Tax Cuts and Jobs Act of 2017, which extended the required holding period for carried interest to receive capital gains treatment from one year to three years — a more limited version of the same policy goal this bill pursues.