Posted 02/03/2012 06:54 PM ET

Taxes: President Obama’s campaign to soak rich investors is already getting complicated. His small-business breaks would benefit those he says are paying less than a fair share.

The State of the Union speech is fast fading into history, but one of its themes — raising taxes on the rich — has legs in politics if not in policy. This is an election year, and the idea of making people like Warren Buffett (or Mitt Romney) pay a higher share of the income to the government polls well.

One of Obama’s allies in Congress, Rep. Sheldon Whitehouse, D-R.I., has introduced a bill that would impose a minimum effective tax rate of 30% on people earning more than $1 million. The bill may not get very far in the current Congress, but that’s not the point. The object is to win in November. The 30% bill is political rhetoric, not serious policy.

Even Obama must know that his endorsement of a 30% minimum tax on the wealthy is just hot air. As a practical matter, the only way to garner that much from the Warren Buffett-Mitt Romney set is to end preferential treatment for capital gains and stock dividends, raising the top rates from 15% to 35%.

Even then, a big giver to church and charity, such as Romney, would still be able to keep the federal share tax bite below 30%.

But the Obama administration says, at least this time around, that it will leave the charitable deduction alone. So it would have to dig deeply into investment income if it is to come close to imposing a Buffett Rule that meets its own fairness test.

In so doing, it would reverse longstanding bipartisan tax policy. Capital gains (usually from sales of assets held more than a year) have had special low rates for most of the history of the income tax. The only time they were taxed like ordinary income was in the brief time when the 1986 Reagan-era tax reform took the top marginal income rate all the way down to 28%.

Whenever top rates have been higher than that, Washington has seen the value of setting a lower cap-gains rate. This is a way of encouraging investment as well as adjusting for the effects of inflation and taxes already taken out of invested capital.

If you invest in a business paying the 35% corporate tax rate, your capital gain is diminished by the business having that much less left over to reinvest in itself. And most investors are buying assets with money that already has been taxed once, when they received it as wages or business income.

Read more at: http://news.investors.com/Article/600123/201202031854/obama-word-and-deed-differ-on-capital-gains.htm

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