Warren Buffett is worried that he doesn’t pay enough in taxes. In an August op-ed in the New York Times, the billionaire pointed out that his effective federal tax rate—the percentage of all his income that he paid in federal tax—was just 17.4 percent. The reason for Buffett’s light burden is that he gets so much of his income from investments in company stocks, which are taxed comparatively lightly: while the federal tax rate for wage income can rise as high as 35 percent, most income from stocks is taxed at a flat 15 percent.
Seizing on Buffett’s complaint, President Barack Obama has proposed the “Buffett Rule,” which would compel millionaires to pay as great a share of their incomes as lower earners do, effectively taxing their capital gains and dividends more. It’s easy to see the intuitive appeal of raising taxes on capital income. Also in August, business columnist James Stewart wrote in the Times that “simple fairness” was the best argument for taxing capital gains at ordinary income rates. He quoted economist Leonard Burman: “In my experience earning income from capital gains is a lot easier than earning ordinary income. Why not tax both at the same rate? It only seems fair.” Most tax-reform proposals today likewise seek to raise taxes on capital.