The question of whether these earnings should be reported as income or capital gains is a legitimate one, but the controversy over this -- including Donald Trump's public statements -- is nothing more than political pandering.
Liberal Senators Urge Treasury to Limit Carried Interest Tax Break
CNBC Explains: Carried Interest
What is carried interest?
Carried interest is a rule in the tax code that lets the managers of some types of private investment funds—hedge, private equity, venture capital, real estate and other types of vehicles—pay a lower rate than most individuals.
More specifically, the "general partner" who manages money on behalf of "limited partner" clients receives a share of profits from any investment gain on stocks, bonds, real estate or other securities held for more than a year. A hedge fund manager, for example, usually takes 20 percent of all gains on the fund's investments.
The tax code treats that income as a "long-term capital gain," which is taxed at a lower rate than ordinary income (currently maximums of 20 percent versus 39.6 percent).
Fund managers sometimes also earn a flat management fee (typically 2 percent in the hedge fund industry), which is taxed at the higher ordinary income tax rate.
As best as I can understand, the fund manager does not earn a salary for managing the long term fund or investment. If however they earn a flat management fee that is taxed at the ordinary income rate. But mostly they only earn based on their share of profits from any investment gain. In other words they forgo/sacrifice getting a guaranteed salary (taxed as ordinary income) in exchange for a share of any profits from any future investment gain. If the investment returns no gains, the manager receives no income and in that respect, they are investors and that income, when realized, should be taxed as a capital gain.
It should be simple...you do a job you get paid for...that’s earned income, and taxed appropriately. If you investing YOUR OWN money, that’s capital gains.