> He himself conceded that his secretary pays a higher percentage of her income in taxes than he does

Buffet is himself a redistributionist, and was comparing his capital gains tax rate (where essentially all his "income" comes from) with the earned-income tax rate his secretary pays. In other words, Buffet was indulging in a bit of FUD, to be blunt.

Many economists believe that taxing capital gains lower than income is a Good Thing to encourage investment and savings, even if it results in strange outcomes like Buffet's in edge cases.

Remember when dealing with capital gains you are risking money whereas with normal income you are not. So any taxes on capital gains need to factor in that when you lose, you loose 100% and when you when you only get the return - taxes. If the taxes are too high then the amount of risk/reward becomes lower.

Capital gains isn't there to compensate for risk, nor should it. Let the borrower compensate the investor for their risk.

I think capital gains primarily serves as a crude mechanism to compensate for inflation.

Consider a hypothetical case:

  Year
  2050    $100 would but a 10 day supply of air
          I invest $100 in a jovian mining operation
  2060    $100 would buy a 5 day supply of air
          I sell my interest in the jovian mining operation
             for $300 making a handy $200!
          If taxed as income (33%) I would owe $66 in taxes
          But think about air, I had the equivalent of 10 days
             of air, now I can buy 15 days of air, so I really
             only earned 5 days of air worth $100 which if taxed 
             as income would cost me $33.
          So we invent a 2nd tax scheme for capital gains and
             set the rate at 15%, my $200 profit gets taxed $30
             and we are pretty close to "fair"

Except that only works for certain time periods over which inflation is about 100%. For shorter periods the investor wins. For longer ones the investor loses. And when I say "investor wins" I mean everyone else pays more to cover the government tax bill and vice versa for losing. There is no free lunch.

If only we had invented some sort of "thinking machine" that could perform basic arithmetic operations, and if only investors kept track of when they purchased their investment, and if only we had, say an office that tracked inflation… we could dispense with the crude estimator and just tax people on their profit above inflation.

This is untrue. If you are a small business owner, your earnings are taxed as salary, even though you take as much risk as any venture capitalist.

This is true until you sell your company; at that point the proceeds of the sale are taxed as capital gains. Personally, I think this rewards short-term planning over long-term planning. It's also essentially a subsidy on publicly traded companies that us little guys don't get.

It depends on the type of small business -- how it is incorporated. And yes I agree small businesses have it hard because of regulations and taxation, but I'm in favor of lowering all taxes.

But to claim that capital gains are the same as income is incredibly misleading. In the special case where you are a small business owner that works at the business then yes you are taxed as an employee. The money you invested will be recouped just as venture capital would -- when the company is sold or by paying dividends.

dividends don't help us, as to pay out dividends, I first have to pay corporate tax, which is usually lower than personal tax, but in California, I think, not lower than personal tax plus capital gains which I would have to pay on the dividends.

Sure, I recoup all the money I put in as well as my 'sweat equity' when I sell, and I pay the low capital gains tax rate on that, but like I said, this encourages short-term thinking. Hell, I could happily run my company for another 10 or 20 years. But the capital gains taxes being so much lower than the income tax I pay on money I take out without selling that it might make sense for me to sell out once I'm not doubling twice a year. It's sad, I think, as I think I'd be happier running the company, and the company would probably be better off with someone with a long-term view running it.

Further, capital gains is only part of the tax he pays. The businesses he owns also pay taxes, so the tax on his income is actually the combined tax on the business and the tax on his capital gains.

in the case of dividends, you are correct, you have to pay corp tax on your cash before you can hand it out as dividends (then the shareholders have to pay capital gains tax on it.) however, if the company immediately re-invests its cash, they don't have to pay corp. taxes on it. In theory, you could build a service-based business (where I am, that means no sales tax) that say, grew for a year on it's own revenue but paid no corp tax (in California and many other places there is a minimum tax, but that's small enough to ignore for this) then, at the end of the year, you could flip the company to some investors, and all your profits would be taxed only once, and at the lower capital gains rate.

I strongly suspect Warren Buffet pays orders of magnitude more tax than his secretary.

If you're arguing that he should pay the same percentage of his overall income in tax as his secretary, fine, but that's a different argument.