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.

David Weisbach, a tax prof at the University of Chicago, argues that this is appropriate.

If the private equity guys borrowed the money, invested it, and made a profit, everyone would agree that the profits should be taxed as capital gains — that's what the capital gains tax is for, Weisbach told me this week.

In private-equity funds, the investors' money is structured as equity, rather than debt. But that shouldn't make a difference for how the profits are taxed. "A fundamental economic idea is the type of financing should not affect the taxation," he said. (For more, see this Weisbach paper, which was funded by a private-equity industry group.)