A recent court case has given the federal government a chance to sidestep Congress and eliminate private equity's billion-dollar tax break. The question is whether the Obama administration takes up the fight.
At issue is "carried interest" — a term of art that refers to the profits that a private equity adviser makes from investing in companies. Because of what critics term a loophole and private equity firms call common sense, such income is taxed at the capital gains rate of 20 percent instead of as income, which would put it at a maximum of 39.6 percent. That tax treatment has meant that the heads of private equity firms like the Blackstone Group's Stephen A. Schwarzman pay billions of dollars less in taxes.
This apparent inequality has led many to protest. After all, why should these private equity barons, many of whom are extraordinarily wealthy, get to profit to the tune of extra billions? Even Mr. Schwarzman's co-founder at Blackstone, Peter G. Peterson, has come out against the tax break, stating he "can't justify that."
In defense, private equity advocates like the Private Equity Growth Capital Council argue that the profits are investment income and to change the tax code would mean that private equity firms would have less of an incentive to invest, upending a policy that "has helped America prosper for more than 100 years."
(Read more: Private Equity: CNBC Explains)