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Does Carried Interest Affect MLPs?

The new budget may tax carried interest, but we think it's a nonevent for MLPs.

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We're concerned by a line item in President Obama's budget that promises to reignite the carried interest debate. Carried interest arises in a private-equity or hedge fund context, when managers are compensated with a share of the profits of the fund, called carried interest, in addition to straight management fees. In successful funds, carried interest makes up the overwhelming majority of a manager's compensation, but frequently this component is taxed at the 15% capital gains rate, understandably provoking public ire.

Obama's budget includes a proposal to tax carried interest as ordinary income, which for wealthy fund managers would be at much higher rates--up to 39.6% for top earners under Obama's plan. The budget contemplates that this tax code change will generate nearly $24 billion in incremental tax revenues during the next decade. So far, so good. 

Jason Stevens does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.