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Capital Gains and the ‘Buffett Rule’

President Obama got a lot of attention in September, when he rolled out a deficit reduction plan including his “Buffett Rule” – that no one making more than $1 million should pay a lower tax rate than the middle class.

Obama’s objection to this group (whose income averages about $2.9 million annually) is that they make most of their money from investments. A few of these very high earners make more than two-thirds of their income from capital gains and dividends, which are taxed at 15 percent, said Bob Williams on the TaxVox blog.

While current rates expire at the end of 2012, the Obama administration would raise capital gains rates even as they cut rates on ordinary income. For now, rates continue at historic lows for long-term capital gains and dividends. For taxpayers in the 15 percent income tax bracket and below, the rate is zero. For those in the 25 percent bracket and above, the rate is 15 percent.

The prospects of the "Buffett Rule" becoming law, however, are weak, with strong opposition among congressional Republicans. GOP presidential hopeful Mitt Romney would drop the rate on gains and dividends to zero for most taxpayers, with those making more than $200,000 still having to pay 15 percent, Gleckman said.

Photo: Getty Images