Treasury regulatory authority and the carried interest rule for investment fund managers

Victor Fleischer has a short piece in today's NY Times Dealbook suggesting that the Treasury Department, at the behest of the Obama Administration, could simply flex its regulatory muscles and eliminate the current practice whereby investment fund managers commonly treat compensation that takes the form of "carried interest"  as yielding long-term capital gain that is taxed at only a 20 percent rate, rather than ordinary income that typically would face a 39.6 percent rate.

This change has of course received legislative consideration in recent years but gotten nowhere, in part due to opposition from Republicans - apart from departing Ways and Means Chairman Dave Camp, who would have eliminated the carried interest tax break as part of his ambitious tax reform plan.  (It's only fair to note, however, that not all Congressional Democrats are wildly enthusiastic about the change either.)

Vic argues that, as a matter of regulatory authority, there is "plenty of room" for the Treasury to issue regulations making this change.  He closes by noting that, while doing so might be contrary to common tax regulatory practice in recent decades, which has tended to defer to Congress when hot-button changes are on the table, perhaps we are in a new era:

"Out of deference to Congress, the Treasury Department has traditionally avoided making policy in areas where the legislative branch may act.  'But when the legislative process is as broken as it has become today,' said Daniel N. Shaviro, a law professor at New York University, 'it's simply inevitable that Administrations will care less about such comity, and be more willing to advance their policy views in controversial areas through the unilateral exercise of regulatory authority.'"