Private equity fund managers can earn astounding amounts of money. In 2006 the 25 top earners in the US were paid an average of $570 million each. Because of the way those earnings are taxed, and with income inequality in the US looming ever larger on the political radar, private equity has recently become the focus of congressional efforts to inject greater fairness into the tax code.

Because of a change made to the US tax code in 1986, private equity managers are able to declare their private earnings as capital gains, and therefore to pay tax on it at a rate of only 15%, rather than the 35% they would pay if it was ordinary income. These earnings flow from their partnerships’ cut of the profits of the investments they manage, called “carried interest”.

Yet since private equity partnerships typically provide only 1% of the funds used for the buyouts they orchestrate, something seems amiss. Paying 15% tax when you have just risked billions of dollars on a venture is one thing. But 15% when you are merely the guys who set up the deal? That doesn’t seem right.

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