# ICYMI: New Tax Notes Commentary: Senate Democrats’ Proposed Tax On Phantom Income

Published: 2026-10-19

In Tax Notes, George Callas finds that S. 4330 isn’t a carried interest loophole closer but a tax on phantom income, and questions the Yale Budget Lab’s neutrality.

Senate Democrats are [attempting to sell](https://www.finance.senate.gov/ranking-members-news/wyden-whitehouse-king-lead-introduction-of-bill-closing-carried-interest-tax-loophole) S. 4330 as a way to close the “carried interest loophole,” aided by a study from Yale University’s self-described ["nonpartisan"](/news/icymi-yale-budget-lab-biden-officials-democrat-donations/) Budget Lab.

Last week, federal tax policy expert [George Callas](https://georgecallas.com/) broke down this proposal in a commentary appearing in [Tax Notes](https://www.taxnotes.com/tax-notes-today-federal/carried-interest/senate-democrats-proposed-tax-phantom-income/2026/10/09/7wqyt). Callas finds that it’s not a loophole closer, but a tax on phantom income, and asks whether the Yale Budget Lab is "acting as a neutral scorekeeper or as an advocate for the bill."

"Make no mistake: This is a tax on phantom income, not a simple elimination of a tax rate differential. A fund manager owes tax even though the fund distributed no cash, realized no gain, and did not even appreciate in value. ... As for the bill itself, it is a wolf in sheep's clothing. Under the guise of ending a 'loophole,' the bill imposes an entirely new kind of tax on a base that is partly unrealized gains and partly phantom income. Enacting such an unprecedented tax rule would be both economically destructive and constitutionally dubious."

- George Callas, Callas Strategy Group LLC

Read an excerpt below.

[Senate Democrats’ Proposed Tax On Phantom Income](https://www.taxnotes.com/tax-notes-today-federal/carried-interest/senate-democrats-proposed-tax-phantom-income/2026/10/09/7wqyt)

By George Callas

Tax Notes

October 9, 2026

George Callas is the founder of Callas Strategy Group LLC and previously served as senior tax counsel to former House Speaker Paul D. Ryan.

Excerpt:

Loophole Closer or Tax on Phantom Income?

"The problem, however, is that the text of S. 4330 does not match the description its authors and the press have provided for public consumption. Rather than legislation to close the 17-point tax rate differential, S. 4330 simply creates phantom income and then taxes it."

"The bill would determine by statute the general partner's 'deemed compensation amount' and then tax that deemed compensation amount as ordinary income annually. The word 'deemed' is critical: Federal law would declare that an affected taxpayer earns a certain amount of income, regardless of whether the taxpayer earns that income or even sees their partnership interest appreciate in value. Through this rule, the bill effectively repeals the statutory realization requirement."

"... over a 10-year period they were taxed on $80,000 of income they never earned."

The economic cost

"Put differently, the negative economic impact of the proposal is so strong that 63 percent of the direct revenue raised is lost through damage to the broader economy."

Constitutional Considerations

"Four of the justices ducked the broader realization requirement question, but five showed their hands. Justices Amy Coney Barrett and Samuel Alito, concurring, and Justices Clarence Thomas and Neil M. Gorsuch, dissenting, argued that the 16th Amendment does in fact require realization."

Conclusion

"The Budget Lab's framing of its $88 billion revenue estimate as driven by new and superior data and methodology rather than by taxing phantom income raises questions about whether it is acting as a neutral scorekeeper or as an advocate for the bill."