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Home Themes Private Credit

The Billionaire’s Bonus: Private Equity’s $1 Trillion Tax Secret

by Team Lumida
June 14, 2024
in Private Credit, Trust, Tax, and Estate
Reading Time: 3 mins read
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a close up of a typewriter with a tax heaven sign on it

Photo by Markus Winkler on Unsplash

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Key Takeaways

  1. Private equity firms amassed $1 trillion in ‘carry’ fees since 2000.
  2. Debate intensifies over taxing these fees at lower capital gains rates.
  3. Oxford research reveals potential tax revenue from changing current policies.

What Happened?

Private equity firms have amassed over $1 trillion in ‘carried interest’ fees since 2000, according to research by Ludovic Phalippou, a professor at Oxford’s Saïd School of Business. These fees, which reward fund managers for successful investments, are taxed at the lower capital gains rate of 28%, rather than higher income tax rates.

This has saved private equity firms hundreds of billions of dollars in taxes. The UK’s Labour Party, led by shadow chancellor Rachel Reeves, is advocating for these fees to be taxed as income, aiming to generate an additional £440 million annually. In the US, presidents from Obama to Trump have considered ending this favorable tax treatment but retreated under industry pressure.

Why It Matters?

The $1 trillion in ‘carry’ fees highlights the enormous wealth generated for a select group of private equity billionaires, primarily in the US. This concentration of wealth has significant political implications, as these firms are major donors to both politicians and universities.

According to Phalippou, understanding the potential tax revenue from treating these fees as income could reshape government policies and fiscal strategies. Critics argue that increasing taxes could drive investment firms out of financial hubs like London, potentially impacting foreign capital inflows.

What’s Next?

Expect renewed political debates in both the US and the UK over the tax treatment of ‘carried interest.’ Governments may explore coordinated international efforts to standardize the taxation of these fees. Investors should watch for policy shifts that could affect the private equity landscape, including changes in tax rates and regulatory frameworks.

The private equity industry, represented by groups like the American Investment Council, will likely intensify lobbying efforts to preserve current tax benefits. As the debate unfolds, the potential reclassification of ‘carried interest’ could significantly impact investment strategies and market behaviors.

Source: Financial Times
Tags: Carried interestLobbyingOxford researchprivate equityTax policy
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© 2025 Lumida Wealth Management LLC is an SEC registered investment adviser. Privacy Policy. Cookies Policy.
Disclaimer Important Information This site is for informational purposes only. Information presented on this site does not constitute as investment advice.

Lumida Wealth Management LLC (‘Lumida”) is an SEC registered investment adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.

Lumida's website (referred to herein as the "Website") is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of the Website on the Internet should not be construed by any client and/or prospective client Lumida’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.

Any subsequent, direct communication by Lumida with a prospective client will be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

‍Lead Capture Forms: By submitting your contact information in the forms on this site, you are not obligated to invest in Lumida's product or services.
‍Address: Lumida Wealth Management, 25 W 39th Street Suite 700, New York, NY 10018