Much of Mitt Romney's income at Bain Capital was taxed at the 15% capital gains rate, rather than the 35% rate that is paid on wage income. It also escaped the 15.6% social security tax and the Medicare tax. Those taxes only apply to wage income. Obviously, it is better to earn one's income through capital gains than by wages that are taxed as ordinary income. This article suggests that it would be more practical to tax the carried interest earned by hedge fund managers and private equity managers as ordinary income than to attempt an increase in the capital gains tax rate.
Hedge fund managers and Private equity managers charge their investors a 2% fee which is taxed as ordinary income and they earn 20% on the profits that are earned. The profits are taxed as capital gains even though the hedge funds managers, and private equity managers, have not put up the capital that it is at risk. On the other hand, someone who earns a living managing a portfolio for mutual fund earns a salary that is taxed at ordinary income. There is little difference between what the mutual fund manager does and his counterparts who manage hedge funds and private equity funds. They are both managing other people's money. It does not make sense to tax carried interest as a capital gain. It should be easier to change this tax benefit than it would be to increase the capital gains tax which has a much wider base of support. Capital gains also include gains from inflation, which are difficult to compute and which should not be subject to taxation.