My thoughts exactly - the problem the author is alleging isn't that these things exist, it's summarized in his last paragraph:
A highly complex and largely discrete set of laws and exemptions from laws has been put in place by those in the uppermost reaches of the U.S. financial system. It allows them to protect and increase their wealth and significantly affect the U.S. political and legislative processes. They have real power and real wealth. Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%. Moreover, those at the very top have no incentive whatsoever for revealing or changing the rules.
In other words - the alleged problem is that you can't fix this tax stuff even if you wanted to because the people in control are the ones benefiting (and most other people aren't aware / don't care enough).
I'm not taking a position either way, just clarifying what the author is saying.
(The marginal rate of tax on capital gains is generally much lower than the marginal rate of tax on an equivalent earned income. The investment professionals who strike it big do so by engineering their income to arrive in the shape of capital. Tax it as income and suddenly a whole lot more tax revenue shows up ... and the Gini coefficient in the society in question drops a little bit.)
Taking advantage of capital gains might be tax avoidance from a certain point of view, but it's also a useful for helping grow wealth and the economy in general.
Having large sums of private capital helps the economy-- how does it help it? By making it easy to borrow money, like the VC that so many HNers are seeking.
So the argument for differential taxation of income versus capital gains is to incentive investment. However, I'm not sure investment needs to be incentivized right now. There is a ton of private capital floating around right now looking for productive investments in the US, and they just don't exist. So the money goes overseas, or into elaborate, questionable financial instruments.
It is not even clear that it is tax avoidance. In most situations the capital gains preference is meant to mitigate, and in fact only partially mitigates, income taxation at the corporate level.
Preferences for real estate and investment managers in the form of carried interest...well, that's another story.
If capital gains were taxed as regular income, that would mean a whole lot more money would be flowing into the governments coffers, and as such the income tax rate could be lowered as a result for all parties. You'd have to run the numbers to see but it seems reasonable.
Another problem with taxing capital gains heavily is that it distorts investment by discouraging dividends and buybacks in favor of risky attempts at growth. Companies irrationally choose to grow and make high risk acquisitions rather than simply pay out big dividends. This contributes to business cycle instability, as well as inefficient allocation of capital; the incentive is to keep capital locked up in a conglomerate.
The idea that it is possible for those that earn vast quantities of money more than your "standard joe" to pay _less_ tax on that considerably larger cash pile.
The line about lobbying for a new corporate exemption on "repatriating" cash from either tax havens or anywhere else abroad at the pitiful tax rate of 5.75% compared to the base 10% that someone that works at a diner has to pay illustrates the issue rather well.
This is cash that was taxed once in the foreign jurisdiction at whatever prevailing rate was in effect there. With the exception of the US, nearly all developed countries have territorial tax systems at which the rate on those foreign profits would be 0%.
A repatriation holiday would be a huge (and poorly targeted, considering nearly the entire benefit inures to about 10-20 firms) giveaway, but it's only discussed in the first place because of our strange worldwide corporate tax system.
If a non-US citizen works at a diner in a tax haven or anywhere else abroad, and brings money into the US, they typically pay 0% tax (to the US) on that money.
This is the analogous situation to non-US corporations (possibly owned by US corps) leaving profits overseas.
But typically, they are working there, not setting up a virtual office. If these super rich are working in the US, they should pay tax. If they are not working, why don't they deserve to be taxed?
The super rich working in the US do pay tax on their income. You seem to be conflating many separate issues, so let me explain in detail how it works.
Sergei Brin pays taxes on his income to the US.
Google Ireland doesn't pay taxes to the US on income earned in Ireland until they transfer the money to the US. (They do, however, pay taxes to Ireland.)
A guy working at a diner in Ireland will, as far as I know, never pay taxes even if he does transfer money to the US.
Google UK also pays most of it taxes to Ireland, despite the revenue being from the UK. Wonder if that has anything to do with Ireland having lower taxes?
I'm assuming it's increasing the long term capital gains tax rate. According to http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United..., the short term rate is as arjunnarayan suggested, barring any differences in exemptions between capital gains and income tax rates.
It's also an issue of timing and deferral. Because one can offset short-term capital gains with capital losses, and individuals generally have absolute control over realization of capital gains, the effective rate on capital gains can effectively be zero or near-zero given sufficient liquidity, despite a statutory rate equal to the ordinary income rate.
