Abstract
In late July 2022, as the Inflation Reduction Act was being finalized, a provision limiting the carried interest preference, which allows billionaire hedge fund managers to qualify for the long-term capital gains rate on their highly lucrative “carry,” was scrapped. This continued a string of defeats for sensible policy reform dating back at least as far as Victor Fleischer’s congressional testimony in 2007 and his seminal Two and Twenty law review article. The usual special interest view of politics took the blame for the inertia.
In this Article, we explain how a “reverse Mancur Olson,” or an ex-ante rent extraction model, better explains what has—and has not—been going on. Lawmakers of both political parties have a financial interest in “stringing along” carried interest and similar issues to extract rents in the form of campaign contributions. We illustrate how presidents and congressional members of both parties have played this game over the past 15 years, preserving the appearance of wanting to end the preference while maintaining the reality of doing nothing. The phenomenon not only makes sensible law reform difficult by keeping both rents and rent-extracting mechanisms in the law, but it also contributes to the overwhelming incumbency advantage that prevents more dynamic democratic turnover and change.
How to Cite
66 Ariz. L. Rev. 357 (2024)
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