An article in the Wall Street Journal outlined a variety of proposals by candidates for the 2020 Democratic nomination for president to raise tax rates on people earning high incomes. One proposal discussed in the article, the Buffett Rule, is named after billionaire Warren Buffett, who once noted that he was paying a lower tax rate than his secretary. The Buffett Rule would set a new tax rate for those earning incomes of more than $1 million per year.
a. Looking at the table in the Apply the Concept feature for the percentage of federal taxes paid by the different income categories, is Mr. Buffett’s situation of paying a lower tax rate than his secretary typical of the highest 1 percent of U.S. income earners?
b. According to an article in the New York Times, Buffett’s “income comes mostly from his investments, which are taxed at the capital gains rate of 15 percent. His secretary is most likely paid a salary and bonus, which would be taxed as ordinary income, at a rate that goes as high as 35 percent.” What are capital gains? Which goals and principles of evaluating taxes are relevant to considering whether the federal government should continue to tax capital gains at a lower rate than ordinary income? Briefly explain.