The Carried Interest Loophole

The Carried Interest Loophole is a $18-billion-a-year giveaway to asset managers that corrupts tax fairness more blatantly than any rule on this list. Private equity and hedge fund managers pay only 20% capital gains tax on performance fees—called carried interest—rather than the 37% ordinary income rate, despite the fees being compensation for labor, not capital. This loophole saves the top 400 earners an average of $45 million each annually, according to a 2022 Treasury analysis. That per-person subsidy is 2.5 times larger than the benefit from the Pattern Day Trader Rule’s (rank #4) cost burden on small traders, because PDT at least only restricts behavior while this loophole directly shortchanges public revenue. Both parties have promised to close it for 20 years without a single bill reaching a vote.