It's worth noting that annual income above five million is almost definitely coming from investment of both labor and capital (ie, working to manage/direct a business you own, and seeing gains from the value of that business -- or working to manage your stocks and seeing gains from their value) rather than just from labor. This comes with very different risks, including the ability to lose your capital, which is why it's taxed in a very different way.

It's also worth noting that the tax rate for the very rich is still 15%. As far as I can tell, certain very rich people "not paying taxes" is a myth.

Finally, it's worth noting that Notch is not American.

The UK has a variety of schemes of tax planning[1], tax avoidance[2], and tax evasion[3]. Using such schemes usually requires someone to be wealthy enough to afford accountants and access to the scheme.

Rich people do have ways of reducing their tax burden, sometimes to surprisingly low amounts.

[1] planning is normal reduction of tax burden and is unlikely to be challenged by tax authorities.

[2] avoidance is legal, but sometimes exploits loopholes in tax laws in weird ways and you might risk the Inland Revenue changing the regulations - sometimes retroactively.

[3] evasion is just illegally not paying tax.

Many of the recent tax avoidance schemes that celebrities have tried to use in the UK were outright fraudulent - for example, one involved them falsely claiming that they were used car dealers and reporting fictious losses which were large enough to offset their income for the year. Another involved reporting that they'd invested money in UK film production when they hadn't.

> This comes with very different risks, including the ability to lose your capital, which is why it's taxed in a very different way.

Exactly, there are good reasons for this. The problem is that it would be grossly unfair to tax a small business owner or small investor at say income tax levels because their risks are so much higher. On the other hand a big investor will millions or billions ends up paying the same tax rate as that small business owner or investor, but is able to spread their risk across many investments reducing the overall risk. Yes it would be unfair to tax them at a higher rate for doing fundamentally the same thing - how would we justify one tax rate for one investor in a company, but another rate for this other investor?

Taxation is a hard problem.

"Yes it would be unfair to tax them at a higher rate for doing fundamentally the same thing - how would we justify one tax rate for one investor in a company, but another rate for this other investor?"

Because taxation has gone way beyond what it was initially meant to do. That's why it's a hard problem; we're trying to make value and fairness judgements and using that as a basis for applying tax.

To me, personally, people can't claim fairness if they're treating people differently based on their arbitrary value judgements. Until we start treating "fairness" as a universal, with no subjective component.

What do you imagine fairness to mean without subjective components? I'd say that value is a subjective concept and I cant think of a definition of fairness that is not based on value.

Why can't a small investor spread their investments? Isn't that what index funds are for?

Mitt Romney also gave a huge amount of his annual compensation to charity, which reduced his tax rate substantially.

The big reason why the rich guys can lower their tax rates is because they can use investment losses to offset taxes. It's not a loophole, just a tax deduction you can optimize.