Steve Schwarzman on Carried Interest

Steve Schwarzman defends the taxation of carried interest at capital gains rates, a practice that has existed since before his career began, arguing that it is fundamentally different from ordinary compensation because it is contingent upon the overall performance of the fund's portfolio companies. He contends that opponents mischaracterize the income as being solely for services rendered, ignoring that general partners must invest significant capital and face the risk of losses, for which limited partners bear the primary burden. He notes that partners must often pay back carried interest if the fund ultimately underperforms a hurdle rate, a condition that generally does not apply to ordinary compensation earners. He argues that the current treatment reflects the capital risk assumed, likening it to normal entrepreneurial risk that the tax code has historically favored with lower rates.

The context of the debate, as he presented it, is a political one where opponents seek to characterize his earnings as simply ordinary compensation. He points out that in his firm's structure, the general partner's share of profit is contingent upon achieving a minimum return, typically around 8%, and that if the income were treated as ordinary income, it would distort the economics of the partnership arrangement. The framework under which he operates, where fund managers receive a share of profits after investors meet a hurdle rate, has been the long-standing method for compensating working partners in an investment partnership.