The Buffett Rule and Taxing the Ultra-Wealthy

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Over the past 30 years, the divide between the wealthy and the rest of America has ballooned. The "great contraction" of the past few years has only accelerated the trend. Recently, the top 1% owned approximately one-third of the nation's wealth; the top 10% own more than half. Soaring sales at Coach (NYS: COH) and lululemon athletica (NAS: LULU) alongside weak numbers at Best Buy (NYS: BBY) and Aeropostale (NYS: ARO) attest to a redistribution of wealth toward the top.

Much of the increasing disparity results from tax policies that disproportionately favor the wealthy, ranging from various tax breaks to the 15% capital gains tax rate. Since the ultra-wealthy make the majority of their income from investing, rather than wages, they tend to pay a lower rate. Additionally, employees at private equity shops like Blackstone (NYS: BX) and American Capital (NAS: ACAS) are often able to have their income taxed at the much lower capital gains rate.

Last month, Warren Buffett, the world's third-richest person, took to the op-ed pages to argue that, at a time of national hand-wringing about budget deficits, it's absurd he pays a lower tax rate than his secretary:

The megarich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It's a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot. ...

My friends and I have been coddled long enough by a billionaire-friendly Congress. It's time for our government to get serious about shared sacrifice.

That op-ed spurred President Barack Obama to propose the "Buffett Rule" over the weekend, which would essentially require everyone making more than $1 million a year to pay at least the same tax rate as middle-income taxpayers.

In a recent appearance on the CBC's Lang and O'Leary Exchange, Motley Fool macroeconomics editor Ilan Moscovitz discussed Buffett's op-ed, noted that U.S. economic growth isn't particularly dependent on low tax rates for the wealthy, and answered some questions about tax options for the U.S.

You can see the interview, which begins at the 36:50 mark, here.

What do you think of the proposed Buffett Rule? Share your thoughts in the comment box below. You can also check out more Foolish coverage on the Buffett Rule and taxes here:

At the time this article was published Ilan Moscovitz owns shares of Lululemon. The Motley Fool owns shares of Best Buy, Coach, lululemon athletica, and Aeropostale. Motley Fool newsletter services have recommended buying shares of Coach and lululemon athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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