The company's S-1 lays the groundwork for what is widely expected to be one of the largest initial public offerings of the year, second only to Uber's IPO in May. It's also...Technologyread more
Fraud investigator Harry Markopolos' accusations extended beyond GE's management to actuaries, auditors and analysts who he claims overlooked billions in liabilities.Marketsread more
Trump's tweet comes a day after Apple put out a press release describing the money it spends on U.S.-based suppliers and vendors.Technologyread more
CNBC combed through Wall Street research to see which stocks are still a buy after their earnings reports.Marketsread more
President Donald Trump held a call on Wednesday with the CEOs of three major U.S. banks, according to people with knowledge of the situation.Marketsread more
Despite aggressive strides, Waymo needs one thing before their self-driving cars become a seriously useful transportation system: people. We talked to the ones closest to it.Technologyread more
Scientists say the smoke plumes, filled with megatons of tiny, harmful particles, could travel to other areas of the world and cause serious respiratory problems for people.Weather & Natural Disastersread more
Some Weight Watchers loyalists applaud Kurbo by WW. But nutritionists worry Kurbo promotes an unhealthy relationship with food during an especially impressionable time.Health and Scienceread more
Benefits from what President Trump called "the biggest reform of all time" to the tax code have dwindled to a faint breeze just 20 months after its enactment, writes John...Politicsread more
Epstein, 66, was found in his cell in Manhattan federal lockup Saturday morning and transferred to a nearby hospital, where he was subsequently pronounced dead.Politicsread more
Air travelers faced delays at U.S. airports on Friday afternoon after a computer issue snarled processing of international arrivals.Airlinesread more
One of the reasons elite private fund managers can make millions or even billions of dollars in a single year is because they often pay relatively low taxes due to something called carried interest. Critics call it a tax loophole that allows the rich to get richer, but proponents say it's necessary to spur long-term investment. But what is carried interest, and why is it so controversial?
What is carried interest?
Carried interest is a rule in the tax code that lets the managers of some types of private investment funds—hedge, private equity, venture capital, real estate and other types of vehicles—pay a lower rate than most individuals.
More specifically, the "general partner" who manages money on behalf of "limited partner" clients receives a share of profits from any investment gain on stocks, bonds, real estate or other securities held for more than a year. A hedge fund manager, for example, usually takes 20 percent of all gains on the fund's investments.
The tax code treats that income as a "long-term capital gain," which is taxed at a lower rate than ordinary income (currently maximums of 20 percent versus 39.6 percent).
Fund managers sometimes also earn a flat management fee (typically 2 percent in the hedge fund industry), which is taxed at the higher ordinary income tax rate.
What's behind the idea?
Carried interest has been U.S. law for more than 50 years as an incentive for long-term investment. The idea is that putting up a building, starting a small business or investing in company stock carries risk.
The thinking goes that entrepreneurs should be rewarded when they sell something they helped build through early vision and money, as opposed to someone who just bought and sold something quickly, and didn't take the risk inherent with a start-up.
Proponents also contend that carried interest aligns the interests of money managers and their clients. The general partner makes far less or even no money when their fund performs poorly; they're proportionally rewarded when their investments gain in value.
Why is it so controversial?
Investment managers of private funds—often individuals, but sometimes a group that makes up the "general partner"—are some of the wealthiest people in the country in part because of the cut they take on investment gains. Most money managers are paid based on their performance rather than a regular salary, which makes their annual income taxed at a much lower rate that most other people.
It angers some that such high earners should be taxed at a lower rate than those who make far less. Some critics of carried interest believe it should be done away with all together and all fund managers should see the investment gains they pocket taxed like a regular salary.
Others say carried interest should apply only to the personal funds money managers have in their own fund—not the gains on the investments managed for clients such as pensions, endowments and foundations.
The carried interest earned from other people's money constitute the manager's "labor" or work and not capital risk, and therefor should be taxed like ordinary income. Another proposed fix is to make the carried interest tax discount proportional with the amount of money the investment manager puts in up front.
Politicians have long threatened to change carried interest rules, but the effort has never succeeded. Trade groups for private equity, hedge fund and other effected industries have fought to keep carried interest as is.
—By CNBC's Lawrence Delevingne. Follow him on Twitter .