Do we need any further evidence that our tax code needs radical reform after the State of the Union address?
During the speech the President called for several tax changes, specifically citing the current anecdote about Warren Buffet's secretary paying a higher tax rate than he does. Really? If the President of the United States so completely fails to understand the tax code, clearly it is too complicated.
Admittedly taxpayers are subjected to dozens of taxes and fees, even if you only count those imposed by the federal government. And then there are dozens and dozens of exceptions, exclusions and credits that may apply. But even through that thicket of confusion one thing should be clear - income and capital gains are not the same thing. Comparing one to the other is as flawed as comparing, well, Warren Buffet to his secretary.
Income tax is calculated as a certain percentage of a person's earnings. A capital gains tax is a tax on capital gains, which are realized from the sale of stocks, bonds, precious metals and property.
So, presumably Buffet's secretary is having most of her income taxed by the federal income tax, a marginal rate which varies from 10% to 35% (although nearly ½ the country effectively pays no income tax because of all of the money the federal government takes from some to give to others). Now let's assume she takes part of what the federal government leaves her each year and saves it until she has enough to buy a piece of land. A couple years later she decides to sell the land which now has a higher value (perhaps because of inflation) so now she has to pay a capital gains tax (15%) on the amount the property increased in value. So, she paid income tax on her earnings first and then paid an additional capital gains tax on the money second.
Some people save enough and then invest so that over time they may be able to live on their interest and capital gains. Those people, having already paid tax on their earned income, and having done a good job of saving and investing, would pay an additional, second 15% tax.
That, Mr. President, is how it really works, two different taxes on one stream of earnings. Double taxation, in other words.