Quite why private equity billionaires pay lower rates of tax than their cleaning ladies do on their wages has long been a puzzle. In private, few in the industry bother to defend the tax treatment of carried interest, the generally 20 per cent of profits made after an 8 per cent hurdle rate, as capital gains rather than income. Sure, there is a good public policy case to be made for allowing the proceeds of venture capital investments to be taxed as capital gains. Business creation benefits from the existence of angel and early stage investors. But the bloated buy-out barons, particularly the leveraged flippers of existing businesses, need no special favours.

In both the US and UK, which respectively account for 50 per cent and 25 per cent of the industry, politicians now have carry in their sights. President Barack Obama's proposed federal budget for the 2011 fiscal year would tax carry at the ordinary marginal tax income level of up to 35 per cent – instead of the current 15 per cent capital gains rate. In the short term, this will raise little revenue: there is little carry currently being generated. Funds of the 2004-07 vintage have hardly made stellar returns. Instead, most have destroyed copious quantities of their investors' capital. The proposed change would raise just $1.5bn in the coming tax year, rising to a more respectable $3.3bn in the following year and $3.9bn in fiscal 2014. In total, it might net almost $24bn by 2020.

Such legislation would be unlikely to put the US at a significant competitive disadvantage. In the UK, which went to great lengths to attract private equity houses during the recent “age of irresponsibility”, George Osborne, shadow chancellor, is also mulling a change to the tax regime for carried interest. He is also seemingly tempted by the idea of tackling the tax breaks given to debt financing over equity. In his view, these are more generous in the UK than in any other major economy. Buy-out groups must brace for greater shocks to their business model than the taxation of carried interest as income alone.