The issue of tax loopholes for the rich has been simmering for months, but boiled up again this week after Mr. Buffett, the famed investor and Berkshire Hathaway chief executive, called for higher taxes for the wealthy in an Op-Ed column in The New York Times. “My friends and I have been coddled long enough by a billionaire-friendly Congress,” he wrote.
President Obama has been making a similar argument, and has made the “carried interest” exemption from ordinary income rates, which benefits hedge fund and private equity managers, the centerpiece of his tax campaign. “How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a lower rate than their secretaries? It’s not fair. It’s not right,” the president said a few weeks ago. ...
Proponents of lower — even zero — capital gains rates have some academic research and statistics to support their claims. Still, there’s no doubt that the root of the problem highlighted by Mr. Buffett is the disparity between tax rates on capital gains and ordinary income. Were these rates the same, the debate over how to treat carried interest would vanish, along with much of the disparity between tax rates for the rich and people like Mr. Buffett’s secretary.
Is that so unthinkable? It does seem intuitive that lower taxes and thus potentially greater rewards would encourage risk-taking and investment, and surely at some rate high taxes can discourage any endeavor. But even some hedge fund and private equity officials concede that the argument for lower capital gains rates rests more on faith than science. “I’ve seen study after study that says lower capital gains rates have no impact on behavior,” the hedge fund official told me.
That view is also backed by a growing amount of academic research questioning the premise that lower capital gains rates promote growth. The evidence “is murky, at best,” said Leonard E. Burman, the Daniel Patrick Moynihan professor at the Maxwell School of Syracuse University. ... Whatever benefits lower capital gains rates might generate, they indisputably complicate the tax code and have spawned a multibillion-dollar industry in tax avoidance. “Every imaginable individual income tax shelter is driven by the differential,” Mr. Burman noted. He added that the tax code was needlessly complex. “Have you looked at the alternate rate schedule on the back of Schedule D? It’s so complicated. It’s insane. That alone is a really good argument for change.”
In the end, the most compelling argument for equalizing tax rates on capital gains and ordinary income may not be economic efficiency, growth incentives, higher tax revenue or reducing the deficit. It’s simple fairness. It’s hard to quantify or put a dollar value on a just society. “I’ve earned both, and in my experience earning income from capital gains is a lot easier than earning ordinary income,” Mr. Burman said. “Why not tax both at the same rate? It only seems fair.”