In July I wrote a piece criticizing the tax break for what is referred to as “carried interest.” That topic is back in the news because President Obama’s proposed budget suggests we might eliminate it.

Why does our tax code include this tax preference? What purpose does it serve and how is it justified? Here are three reasons why one thing might be taxed less than another: to further overall equality, to promote an activity that advances the general well-being, or to reward a supporter or friend of the decision maker.

The first of these rationales is based in fairness. It is a basic principle that the tax system must be fair. And while there is great disagreement throughout the land as to what constitutes “fair,” it is universally accepted that we seek to fulfill that abstract concept. Thus, for example, our progressive income tax imposes higher rates on those who earn more.

The second reason to tax one activity differently than another is to encourage (or discourage) something to advance the general welfare. So, for many years, the United States has imposed lower taxes on certain energy production in a belief that creating more oil and gas benefited the nation as a whole. Or, to cite the opposite type of example, extra taxes on “sins” such as tobacco, alcohol, and gambling are meant both to raise revenue and to discourage the activity itself.

The third example, to help friends and punish foes, goes under the general heading of corruption. For example, when certain favored oligarchs are allowed to avoid some of the tax they owe to the Russian Federation, they are presumably being rewarded for supporting (or paying) the government officials who make it possible. Simple graft is illegal. It should be argued, though, that even the more subtle forms of corruption have no place in our system of taxation.

Returning to the question that necessarily flows from the President’s budgetary proposal to eliminate the “carried interest” tax preference; why do we have this tax “loophole” in the first place? What purpose does it serve and how does it advance the interests of the nation? Is it there to further equality and fairness, to promote a certain activity, or is it really just an artifact of corruption?