Romney's Tax Disclosures Provide Perfect Foil for President's Proposals for Tax Fairness

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6. Carried Interest: Why Mitt Romney's Tax Rate Is 15 Percent

Carried interest became a political issue a few years back, when a tax-law prof named Victor Fleischer wrote an academic paper arguing that "this quirk in the tax law allows some of the richest workers in the country to pay tax on their labor income at a low rate."

Many private-equity managers are paid under a structure popularly known as "two and twenty": They get a paid a fee that's two percent of the assets under management, and they also get to keep 20 percent of the profits from their funds. That 20 percent is carried interest.

Here's a wildly oversimplified example. Imagine that investors — pension plans, endowments, whatever — put $100 million into a private-equity fund. The fund turns a profit of $15 million. The people who run the fund would get $2 million as a management fee, plus $3 million as a share of the profits.

The $2 million is taxed as income; the $3 million is taxed at the (much lower) capital gains rate.

read: http://www.npr.org/blogs/money/2012/01/19/145449117/carried-interest-why-mitt-romneys-tax-rate-is-15-percent