A fair tax code fails if the largest fortunes can route around it. The Accord closes the conversion games that turn labor into capital gains, income into unrealized appreciation, inheritance into tax-free basis step-up, philanthropy into donor-controlled tax avoidance, and gifts into estate-tax escape.
Compensation is recharacterized as capital gain. The most cited example is carried interest: PE and hedge-fund principals receive a profits-interest stake in the funds they manage, and the appreciation on that stake is taxed as long-term capital gain (23.8% with NIIT) rather than as ordinary compensation income (which would top at 37% federal under current law). The economic substance is fee-for-service compensation; the legal form is investment.
The same conversion appears in three adjacent forms. Founder equity above a sweat-equity safe harbor: a founder-CEO who draws a nominal salary but accumulates appreciating stock pays cap-gain rates on that appreciation when realized. Partnership special allocations: an LLC or partnership operating agreement assigns income to a partner in a pattern that bears no relation to the partner's capital contribution, simply to push income into the lower-rate bucket. And executive equity grants generally — the larger an executive's grant relative to their salary, the larger the share of compensation that escapes ordinary rates.
The cumulative scale is meaningful. CRS and JCT estimates put carried-interest preferential treatment alone in the $1.4–18B/year tax-expenditure range; partnership-allocation games are larger but harder to bound; founder-equity hold (combined with buy-borrow-die) is the largest single mechanism by which top-of-distribution earnings escape ordinary rates.
Substance governs treatment, not legal form. The architecture closes the conversion routes through three reinforcing instruments — none alone, all together.
Capital-gains convergence above the $10M lifetime cap eliminates the rate-arbitrage incentive at the high end: the favored rate continues for ordinary long-term savers but not for serial high-end realizers. Comprehensive withholding closes the timing-arbitrage incentive: vested equity, exercised options, and the active-participation share of partnership distributions enter the withholding base on the same source-collection footing as wages.
Specific anti-conversion rules cover the recurring patterns. Carried interest is taxed as ordinary income, period — no holding-period extension, no partnership-form preserve. Founder-equity beyond a sweat-equity safe harbor (specification pending v10.2) flows to ordinary rates. Partnership special allocations lacking economic substance are recharacterized to the substance.
High-end professionals who today route compensation through capital-gains channels. PE and hedge-fund principals (carried interest). Founders post-IPO with substantial equity holdings. Executives at firms where equity-based compensation is a large multiple of salary. Partners in firms with aggressive special-allocation provisions.
Practically: the top fraction of the top 1% — a small filer base, but with very large per-filer effective-rate increases. The Buffett, Bezos, and Zuckerberg cases (see real-world cases) illustrate the pattern, though they overlap with buy-borrow-die rather than being purely conversion cases.
Genuine entrepreneurs taking founding-stage risk on undiversified equity. The sweat-equity safe harbor (threshold and duration pending v10.2) preserves the canonical case the cap-gains preference was designed for: an early-stage founder who works for years on undiversified equity bears real risk and earns the gain on its appreciation.
Ordinary employees with equity grants are already in the comprehensive withholding base; the convergence rule does not bite below the $10M lifetime cap. A typical software engineer with vested RSUs sees no change.
Genuine investment activity — managing a portfolio of public equities, holding rental real estate, owning a small business outside the management role — continues to qualify for the favored rate up to CGAL.
Pending canonical scoring.
Wage-to-capital closure has modest standalone revenue but large operational impact. Its primary load is making the capital-gains convergence and progressive rate ladder collectable by removing the most common conversion route. Without these closures, the income-side spine has a hole at the top: ordinary income converts to capital gain and pays the favored rate forever.
The interaction effect is what matters. Carried interest taxed as ordinary at the top costs the affected filers ~30 percentage points on the affected income. Multiplied across PE/hedge-fund principal compensation in the high tens of billions per year, the recovery is substantial — but most of it surfaces in income-tax aggregates rather than as a standalone "carried interest" line.
See tax ladder · fiscal scoring
- Carried interest
- Taxed as ordinary income. No two-year-hold safe harbor (closed by current §1061 only narrowly), no partnership-form preserve. The substance is fee-for-service compensation.
- Founder-equity beyond sweat-equity
- Founder gains above a published sweat-equity safe harbor flow to ordinary rates above the CGAL. The safe harbor protects genuine founding-stage risk; it does not protect founder-employees who take low salary and accumulate equity for years as a rate-arbitrage strategy.
- Partnership special allocations
- Allocations lacking economic substance fail the substance test. The allocated amount enters the active participant's compensation base as payroll tax + ordinary income on the substance of the work.
- Executive equity grants
- Vested equity and exercised options enter the comprehensive withholding base. The form (RSU vs ISO vs NQSO vs restricted stock) does not change whether tax is collected, only when (specification pending v10.2 for grant-vs-vest-vs-exercise timing).
- Cumulative entity fractionation
- Qualifying gains aggregate across all entities the filer beneficially owns. Splitting a position across LLCs, family partnerships, or trusts does not create multiple CGAL allowances.
Each named conversion route closes through a specific rule.
- Capital-gains convergence
- Convergence above the $10M CGAL is the rate-arbitrage closure; this subpage's rules are the form-arbitrage closure. Together they remove the conversion incentive at the rate level AND the form level.
- Comprehensive withholding base
- The base captures every form of compensation. Substance test is binary: working in the entity, or not.
- Pass-through-platform-games
- Companion subpage covering S-corp distributions, contractor classification, and platform-income substance. Wage-to-capital is form-level; pass-through is entity-level. Same principle, different application.
- Buy-borrow-die elimination
- Founders who hold post-conversion appreciation indefinitely are caught by basis-step-up elimination at transfer.
- Estate Tax Prepayment Plan
- Founders accumulating large stock positions above $10M pay the annual estate tax prepayment on the stock — closing the hold-without-realizing escape.
The wage-to-capital closure is what makes the income-side spine collectable. Without it, top earners simply convert ordinary income into capital gain and pay the favored rate. Removing the conversion route is the precondition for the rate ladder and the convergence rule to bite at the top.
Taxing carried interest as ordinary discourages capital formation in early-stage and high-risk investing. Founder-equity rules will chill startup formation if founders can't accumulate undiversified equity at favorable rates during the multi-year build-out.
The sweat-equity safe harbor explicitly protects genuine founding-stage risk: undiversified equity, multi-year hold, founder operating role. The architecture distinguishes the canonical case the cap-gains preference was designed for from the modern pattern of executive-CEO equity compensation that the preference was extended to without principled basis.
For carried interest specifically, the architectural argument is that managing other people's money for a fee is fee-for-service compensation by economic substance. The capital risk that justifies the cap-gains preference is borne by the LP investors, not the GP managers. Treating GP carry as ordinary is the substance-over-form rule applied honestly. The investment activity continues; only its mischaracterization closes.
Honesty about gaps. The Accord's credibility comes partly from explicit acknowledgment of what is not yet specified. The items below are flagged for v10.2 specification or for outside expert review.
- Sweat-equity safe harbor specification: threshold (years of operating role, equity-concentration percentage, undiversified-net-worth fraction) and duration are pending v10.2.
- Founder-vs-executive line: the difference between a genuine founder taking founding-stage risk and a hired-CEO accumulating equity through normal compensation needs explicit fact-and-circumstances test specification.