Early in 2025, President Donald Trump proposed eliminating the carried interest tax break, a mechanism that classifies certain earnings as capital gains and thus subjects them to significantly lower tax rates. According to a new study by Charles Swenson, a professor and Leventhal research fellow at the University of Southern California’s Marshall School of Business, this change would have substantial consequences.

The study predicts that treating carried interest as ordinary income would significantly increase the tax burden on general partners or managers of private equity firms, venture capital companies and real estate partnerships. This hike would reduce incentives for these managers to remain in their industries and to invest in longer-term, riskier projects, potentially shifting their focus toward shorter-term investments or fee-based models.

Swenson’s analysis further indicates that companies seeking investment might struggle to secure financing, as the returns to investment funds would no longer be sufficiently attractive. Contrary to proponents' expectations, the study forecasts a decline in net tax collections due to a contraction in the size of these industries. Using standard economic theory and accounting for labor supply and project risk elasticity, Swenson estimates reductions of 3.94% in private equity and 2.81% in venture capital. These declines could translate into net federal revenue losses of up to $1.2 billion in the first year, escalating to as much as $12.84 billion annually after ten years, alongside up to 1.23 million job losses nationwide.