A typical private-equity fund, the managers usually pay long-term capital gains or "carried interest" even though they put up hardly any of the fund's actual capital (mostly from outside investors). A general principle is that similar jobs should be taxed in a similar fashion....
But the carried-interest tax break upends this rule. If you manage money for a mutual fund or a public company, you pay regular income taxes; do it for a private fund, and you pay capital gains.
...when the law governing partnerships was passed, back in 1954, the goal was to make it easier for people to run what one law professor has termed "simple ventures." No one imagined that the law would end up covering an industry that manages trillions of dollars in assets, and would cost the government billions in tax revenue.
The article closes with the following:
Too often, we're using horse-and-buggy laws to deal with a Formula One world. We shouldn't be too surprised when we get run over.
Check out the full article.