so your making it on the difference of what the IRS classifies as earned income and capital gainsbut they arent
someone making $50k a year is not going to pay the same rate as someone making over $100k a year
if you are using "taxable income" as the basis
They will if they run an investment partnership.
I'll give you a real world example. A portfolio manager runs a $2.5 billion hedge fund. He charges a management fee of 2% and what is known as "carried interest" of 20%, meaning he gets 20% of the profits.
He bets that the housing market is going to collapse and sells swaps against an index of subprime mortgages. He is right and the housing market collapses. His partnership earns 100%, or $2.5 billion. By the terms of the partnership, the hedge fund manager earns 20% of that $2.5 billion, or $500 million.
Now, most reasonable people would view that $500 million as fee income. However, the IRS does not. If you or I were lucky enough to invest with this hedge fund manager, our 100% return would be taxed at a rate of 15%. No problem. Those are capital gains and taxed at the rate of capital gains. However, the hedge fund/private equity lobby was successful at convincing legislators to view that $500 million in carried interest as capital gains like you and I would pay, even though the hedge fund manager did not risk his own capital to earn that $500 million carried interest. (If the manager had his own money in the fund, that is taxed as capital gains, but that is not the issue.) Thus, the hedge fund manager pays a rate of 15% not 35%.
The hedge fund industry is roughly $1 trillion. It was $2 trillion a few years ago. On average, hedge funds return about 10% per year. Thus, at its height, hedge funds generated $200 billion in returns. The loss differential to the Treasury was $40 billion.
I think most Americans would find this patently unfair. This is what Obama wants to change, and is included in the tax package that people are railing against as evidence of class warfare.
For the record, I know people who run these funds. These people worked 100 hours a week when they were making $2 million a year. They worked the same when they were making $20 million a year. They will work just as hard when their after-tax income falls from $20 million to $16 million.
still, you are comparing apples(earned income) to oranges(capital gains)