Capital is taxed at a lower rate than labor. I'm not in favor of that, but carried interest is the main upside income that fund managers make as reward for their labor -- it's not connected to their personal capital. It's fairly wonky, but not impossible to explain, so I'll try with an example. Let's say that an investor puts $10 million in a fund, and ultimately, after several years, the investment winds up worth $15 million, so it gained $5 million (15-5). 20% is a fairly standard carried interest percentage. So if so in this example, the fund managers get rewarded with $1 million dollars (20%x $5mil). The investors wind up with $14 million, a $4 million capital gain, so the investor pays tax on those $4 million at the long term capital gains rate, which is lower than the ordinary income tax rate. The rational is that this investor fueled the economy, with societal benefit, by patiently putting precious capital at risk towards productive purposes. The fund managers, without putting any capital at risk, make claim 1/5 of the fund's profits, $1 million in this example, as compensation for their efforts (i.e. "labor") yet under current laws they preposterously benefit by paying the lower cap gains rate on this clearly ordinary income. It's the reward for their work, and not for returns on capital they personally inject & correspondingly not for any risk they take -- fund managers pull 20% of profits but their investors would suffer 100% of losses on bad investments. That riskless profit by fund managers should not be taxed more favorably than compensation for other jobs in this country.