Last month, Rep. Dave Camp (R-Mich.), the chairman of the House Ways and Means Committee, released a draft proposal to change how we tax certain types of businesses known as pass-throughs, according to a commentary in the New York Times DealBook blog yesterday. Under current law, the owners of these partnerships, limited liability companies and subchapter S corporations pay their share of the company’s income or loss on their individual tax returns instead of paying tax at the entity level. Camp's proposal would maintain this basic approach and simplify aspects of it for small businesses. Reaction to Camp's proposal has been subdued compared with the praise for his plan to change the way derivatives are taxed. Camp's proposal steers clear of the most controversial aspect of partnership tax: carried interest. Carried interest refers to the share of partnership profits earned by an investment fund manager, and under current law it is often taxed at low capital gains rates. Critics argue that because carried interest is labor income, not investment income, it ought to be taxed as ordinary income.
