The Curiouser and Curiouser Case of Carried Interest

62 Pages Posted: 3 Aug 2023 Last revised: 23 Aug 2023

See all articles by Edward J. McCaffery

Edward J. McCaffery

University of Southern California Gould School of Law

Darryll Keith Jones

Florida A&M University College of Law

Date Written: August 1, 2023

Abstract

In late July 2022, as the Inflation Reduction Act was being finalized, a provision limiting the carried interest preference, which allows billionaire hedge fund managers to qualify for the long-term capital gains rate on their highly lucrative “carry,” was scrapped. This continued a string of defeats for sensible policy reform dating back at least as far as Victor Fleischer’s Congressional testimony in 2007 and his seminal Two and Twenty law review article. The usual special interest view of politics took the blame for the inertia.

In this Article, we explain how a “reverse Mancur Olson” or ex ante rent extraction model better explains what has – and has not – been going on. Lawmakers of both political parties have a financial interest in “stringing along” carried interest and similar issues, in order to extract rents in the form of campaign contributions. We illustrate how over the past fifteen years, Presidents and Congressional members of both parties have played this game, preserving the appearance of wanting to end the preference while maintaining the reality of doing nothing. The phenomenon not only makes sensible law reform difficult by keeping both rents and rent-extracting mechanisms in the law, but it also contributes to the overwhelming incumbency advantage that prevents more dynamic democratic turnover and change.

Suggested Citation

McCaffery, Edward J. and Jones, Darryll Keith, The Curiouser and Curiouser Case of Carried Interest (August 1, 2023). Arizona Law Review, Forthcoming, USC CLASS Research Paper No. 23-18, Available at SSRN: https://ssrn.com/abstract=4528472 or http://dx.doi.org/10.2139/ssrn.4528472

Edward J. McCaffery (Contact Author)

University of Southern California Gould School of Law ( email )

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Darryll Keith Jones

Florida A&M University College of Law ( email )

Tallahassee, FL 32307
United States
407 254-3254 (Phone)

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