Part 2/7:
The carried interest loophole allows certain investment managers to pay a lower tax rate on a portion of their earnings. Specifically, profits generated from these investments—known as carry—are taxed at a capital gains rate of 23.8%, significantly lower than the ordinary income tax rate of up to 37%. In essence, the carry refers to the 20% that fund managers earn on their profits. While this has been hailed as a necessary incentive for investment managers, many critics argue that it should be treated as ordinary income given its nature as a fee for services rendered.