Furthermore, although I hate to do it, I have to take issue with Matt's suggestion that "all income should be taxed according to a single rate schedule. Right now, capital income is taxed much more lightly than labor income, which is great if you're rich, but otherwise not such a hot idea." I agree, but I think this requires a caveat.
The problem with investment income is that it gets eroded by inflation. Suppose, for example, that you have $100, the inflation rate is 5%, your return is 8% (3 points higher than inflation), and the tax rate is 30%. Here's what happens.
At the end of the year you have $108, which makes your total income $8. At a 30% tax rate you have to pay $2.40. However, your inflation-adjusted income was only $3, which means that your effective tax rate is 80%. That's a bit steep, no?
Taxing capital income at the same rate as labor income seems like basic fairness to me. But that needs to be a real rate, which means including an inflation adjustment of some kind. Of course, that also means adding some complexity to the tax code. Sorry, Ron. Alternatively, you can do a quick and dirty adjustment by taxing capital gains at a lower rate and figuring that that's close enough. But you really have to do something.