The Tax Code holds the answer to this standoff, and the Code backs Buffett. Taxes may be the bane of the Tea Party, but they’re a relative boon for the wealthy. Let’s look at some of the ways America’s tax system keeps Warren Buffett’s fortune in Warren Buffett’s hands.

The major vehicle is George W. Bush’s 15 percent levy on long-term capital gains — the lowest since FDR’s first term — and on corporate dividends. The top 1 percent of U.S. households owns nearly 40 percent of all privately-held stock, from which the dividends flow. Similarly, the super rich get more than half their income from capital gains. In the meantime, for the working middle-class, the tax rate on wages is 25 percent.

Taxing income from wealth at little more than half the rate of income from work: it’s the perfect recipe to make sure that Warren Buffett (and all the Buffett wannabes) pay effective tax rates far below what their incomes suggest.

How far below? In 2006, Buffett told an interviewer that his tax bill was “far, far less as a fraction of his income than the secretaries or the clerks or anyone else in his office” (and he repeated the statement only recently). His shame in 2006 hits home still: “How can this by fair? How can this be right?”

The Tax Code sets marginal rates too, and these were gutted by President Reagan in 1981 and again in 1986. He slashed the top rate from 70 to 28 percent, and made the Code even less progressive by cutting the number of brackets from 15 to four. The hunger for tax simplification (fewer brackets) trumped the case for progressivity (more brackets).

There are six today, with the top four at 25, 28, 33 and 35 percent— a narrow spread, easily offset by provisions like the capital gains rate. The top rate kicks in at about $400,000 of taxable income, which author and tax expert, David Cay Johnston, calls “bizarre.” It’s a long way, he argues, from $400,000 to $1 million, $5 million, $100 million and hedge-fund billions: “Why don’t we have higher rates for those incomes?”

Even the bottom marginal rates help top earners. A millionaire, filing singly, pays the same 10 percent on the first $8,375 of taxable income as the working poor — and so on, up the income scale. As the Center on Budget and Policy Priorities notes, the real winners from extending Bush’s middle-class tax cuts wouldn’t be middle class: “In fact, a family making more than $1 million will receive more than five times the tax cut benefit, in dollar terms, as a middle-class family making $50,000 to $75,000…”  (Italics in original.)

The Tax Code is also loaded with deductions that effectively rain dollars down on the rich. The Code doesn’t overtly discriminate, but it’s hardwired to make every tax break worth more at the top. All deductions get written off at 35 percent, starting with personal exemptions and standard deductions. This alone trims $7,315 off the tax bill of a post-65 couple. The serious money goes to itemizers, with Uncle Sam handing out five-figure amounts to help pay mortgages on pricy real estate. (Step limits on personal exemptions and itemized deductions are set to return in 2011. The limits expired in 2010 as the last phase of Bush’s 2001 tax cuts.)

President Obama once proposed capping the mortgage interest deduction at 25 percent, the middle class rate. His idea quickly died, attacked as class warfare. This summer, in a piece titled “The Class War We Need,” conservative columnist, Ross Douthat, was aghast to learn that the owners of McMansions were defaulting at twice the usual rate. “The rich are different from you and me,” he wrote. “They know how to game the system.”

They also know that Congress always stands ready to tilt the tax laws their way. When the market crashed in 2008, lawmakers rushed to pass a one-year suspension of required distributions from retirement accounts. Only the haves stood to gain.  Those who actually needed the distributions had to take them and pay taxes. The haves took a pass and saved thousands. Back to Douthat: “In case after case, Washington’s web of subsidies and tax breaks effectively takes money from the middle class and hands it out to speculators and have-mores.”

It’s taken a fortune in lobbying and campaign contributions, but America’s tax system is bearing golden fruit. As even a conservative can see, it’s shifting income to the wealthy.

Several criticisms were quickly leveled, including a charge by political blogger, Kevin Drum, that Mankiw fudged some figures.  He did, but that’s not what bothered me.

Whining. Omissions, serious and curious. Threats. Let’s look at those.

“I Can Afford Higher Taxes” whines about taxes Mankiw has yet to pay and, in the major case, won’t ever pay. It whines about a 2013 bump in the Medicare tax. About a 2011 deduction phaseout that will add “1.2 percentage points to my effective marginal rate.”  It whines that the estate tax, lying in wait, will sabotage a father’s efforts “to put some money aside for my three children.”

Whining doesn’t become a Harvard professor who tells us, admirably, “I could go so far as to say I am almost completely sated.” Sated, but whining away.

Mankiw’s numbers on the estate tax omit a number which would likely shield any legacy he manages to scrape together: an exclusion of $3.5 million per person, or $7 million per couple. Congress has to agree on an amount, but there’s almost no way it will be less. So, unless Mankiw is even more affluent than he admits, none of the Mankiws will ever pay a dime in federal “death taxes”. (Drum also caught this omission.)

With his focus on marginal rates, Mankiw also avoids the rate that really matters, the effective tax rate. The billionaire Warren Buffett aimed the spotlight where it belongs when he confessed, shame-facedly, to paying “far, far less as a fraction of his income than the secretaries or the clerks of anyone else in his office.” Might the same be true of Mankiw and the secretaries at Harvard? You’ll never get that from him; he’s called the 2003 tax cuts on capital gains and corporate dividends “an important accomplishment.”  For sure: taxing Wall Street income at a lower rate than wages is the major reason why effective tax rates on the super-rich are often super-low.

“I Can Afford Higher Taxes” plainly means to threaten us. The well-off, Mankiw infers, will withhold their services once they reach the point where the top marginal rate kicks in (and they’ve exhausted all their tax breaks, about which more later).  Listen to the menace in Mankiw’s summation: “…[S]omeday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist.” And the local orthodontist and the highly trained surgeon will show you the door, or never open it. Don’t say you weren’t warned.

Now for a fast lesson on tax breaks.

Mankiw’s personal blog noted that “I Can Afford Higher Taxes” struck a nerve. Here’s his response to one frequent question:

“Aren’t there ways to avoid some of these taxes, such as IRAs and life insurance trusts? Yes, and I use such tax avoidance mechanisms to the extent they are legal and practical. But there are limits to how much they can be used. Thus, while they lower my average tax rate, they do not affect my marginal tax rate. That is, for any incremental income, I cannot do more, so I am facing the full tax bite.”

Here’s a man who pores over the tax break buffet, takes what he can, and would gladly take more if he weren’t legally stuffed.

We might keep Mankiw from whining by dreaming up more tax breaks. Or he might hire a more creative tax accountant, and fudge numbers in some place other than The New York Times.

This giveaway, little-remarked but costly, is the write-off which the Internal Revenue Service allows every year for stock market losses: when net losses exceed gains, taxable income can be reduced by up to $3,000. This is “I-want-it-now” tax law, and it turns a private loss into a hurry-up claim on the public purse. With the deficit soaring, it richly deserves repeal.

The same as now, capital losses could be written off dollar-for-dollar against capital gains. The same as now, losses could be carried forward indefinitely until they were wiped out. What the repeal would disallow is writing off stock market losses against ordinary income (which, as we shall see, was poor policy in the first place).

Let’s quickly take a look at who gains from this special write-off, and who pays for it. Then let’s look at the hefty inflow to the Treasury if the write-off were written off for good.

Roughly half of all Americans own no stocks, so losses in the market offer no tax advantages to them. While it’s true that more people than ever do own stocks, most have their holdings in tax-sheltered retirement accounts; the write-off doesn’t help them, either. It turns out that the benefits flow entirely to a privileged minority: those well-off enough to have non-retirement investment portfolios. There’s no defense for a tax break so skewed toward the affluent, especially one as gratuitous as this.

And who picks up the tab? Like any other tax deduction, it’s paid for by taxpayers in the aggregate; in this case, the many pony up to benefit the few. Far better for the Treasury, and better for tax fairness, if Congress shows some spine and calls a halt.

The result would be an annual drop in tax expenditures (the revenue the government foregoes via the tax breaks it hands out), and a corresponding uptick in Treasury receipts. Year after year, the deficit would be that much less. Nobody can predict Wall Street’s ups and downs, or individual investors’ either, so the actual numbers could vary widely. All the same, thanks to the market meltdown in 2008 (and the first half of this year too), the benefits of a repeal are almost certainly front-loaded.

Portfolio values sank by hundreds of billions during the sell-off; one estimate put the total losses at north of $2 trillion. Of course not all the losses were realized, and stocks went on to rally sharply for most of 2009. But by mid-year 2010 the markets had once again soured, and the major indices were nowhere near their former levels. So while it’s impossible to know hard numbers, it’s a safe bet that realized losses are near a record high.

Which means it’s an opportune time to disallow writing off those losses against ordinary income. It serves no purpose, the money goes to people who scarcely need it, and it’s an annual drag on the Treasury; the sooner it’s repealed the better for the federal deficit.

And everybody cares about cutting the deficit, right?

Every spring, thanks to a generous tax code provision, the Treasury picks up part of the tab for losing bets on Wall Street. Given last year’s historic plunge, these personal bailouts could rival that $700 billion—and for investors, there’s no dollar cap or cut-off date.

It all adds up to a fiscal hit on the Obama Administration. No matter how large the losses realized in 2008, no matter how long it takes to recoup, Uncle Sam will be sharing the pain. Deeply sharing: up to 35 percent depending on the loser’s tax bracket, or 39.6 percent if Obama ends the Bush tax cuts for higher-income Americans.

Capital loss offsets are the tax code provision that soothes investor wounds. When the year’s trades are reported on tax returns, losses offset taxable gains dollar-for-dollar. If net losses exceed gains, the loss offsets taxable income—by up to $3,000—and provides another tax saving.

Offsets never lose their tax-reducing power. Losses greater than $3,000 (as last year’s probably were) are carried forward indefinitely until they’re used up.

At 15 percent, the tax on long-term capital gains is low compared to the rate on ordinary income like wages. With capital loss offsets, the deal is even sweeter on the downside. While gains are taxed at less than half the top rate, losses are written off at 100 percent across the board. Could losing come any closer to winning?

Yes, say Senator John McCain and Michael Boskin, a former chairman of the Council of Economic Advisers. Senator McCain has proposed raising the capital loss offset against ordinary income from $3,000 to $15,000 per-year for 2008 and 2009. Boskin would up the number to $20,000.

All of which raises some interesting questions. Who profits from these write-offs? Is there good reason for the government (read: taxpayers) to subsidize investment losses? Might the tax system be fairer, and rates perhaps lower, if these subsidies were curbed or even ended?

The first question is easy. Roughly 50 percent of Americans own no stocks, so offsets hold nothing for them. Of the half who do own stocks, most have their portfolios in tax-sheltered retirement accounts. They don’t get those write-offs, either.

That leaves a fairly narrow layer, those affluent enough to have non-retirement stock portfolios. Putting it another way, the benefits of capital loss offsets flow solely to those who already have ample capital.

As to whether subsidies for investors are a sound government policy, sure they are—but it’s foolish to hand out tax breaks just for playing the market. Real investors, a thimbleful of the total, put seed money into initial public offerings (IPOs) and follow-on offerings. They grow jobs and grow businesses. The rest of us play the game at the tables down on Wall Street: we grow portfolios (if we’re lucky), nothing more. Real investors have a strong claim to tax breaks. “Investors” have a frail claim, and it’s time that Congress caught on.

Tax fairness—as always—is in the eye of the 1040 filer. Still, facts matter. Capital loss offsets benefit the few at the expense of the many. Like all tax deductions, they’re paid for by taxpayers in the aggregate—through higher rates, fewer government services, or both. Taxes would be fairer without offsets. Short of repeal, Congress could set a dollar or percentage limit (a form of which was on the books years ago). At the least, the offset against ordinary income should be stricken.

Except for real investors, who are 100 percent deserving of 100 percent offsets (and an income offset too). If they lose more than $3,000 in a year, Michael Boskin’s $20,000 income offset is a starting point.

Back to President Obama, whose Tax Fairness Plan during the campaign opened on this note: “For decades, America has been victim to an anti-tax sentiment that has led to tax cuts that favor wealth, not work.” Two prime examples are offsets and higher taxes on wages than on capital gains. When Congress finally takes up tax reform, Obama’s instinct for fairness should be his one true guide.

Investor-love settled in on the Potomac in 1997, when President Clinton cut the tax on long-term capital gains from 28% to 20%. In 2003, President Bush kept the love coming from the GOP side. He took another 5% off the capital gains rate and slashed the levy on corporate dividends as well.

Just recently, some Republicans proposed adding a dollop of investor-love to the economic stimulus bill. Their idea didn’t fly, but it showed that the flame is still burning.

All this love has worked splendidly for the loved. The tax on long-term gains and qualified dividends has been driven down to 15%. That’s a 70-year low, and it’s less than the rate on the wages of average Americans. As the multi-billionaire Warren Buffett abashedly confessed, the secretaries in his office now pay taxes at a higher rate than he does.

Buffett was quickly called out for coming up short on investor-love. Maria Bartiromo, an anchor on the business channel CNBC, labeled his remark “misleading”.

Misleading? Hardly, compared to the claim that buyers of stocks drive the U.S. economy by growing jobs and new businesses. If so, investor-love might be deserved. Let’s look in on the market and analyze what takes place.

Billions of shares change hands daily on the major exchanges. On any given day, only a minute fraction of those shares grows anything. Days can pass without a bona fide investment; the sounds you hear are aftermarket noise and the closing bell.

In short, “investors” do not grow jobs (except in the financial sector). The seed money that nourishes start-ups and expansions comes from a tiny subset of real investors; the rest of us merely place our bets at the tables down on Wall Street.

What’s the problem with investor-love? First, Warren Buffett has it right: it’s wrong for income from work to be taxed at a higher rate than income from wealth. Second, investor-love has no reason for being; it’s a tax policy shaped by propaganda.

Lawmakers might better follow the policy shaped by Ronald Reagan.

Reagan’s 1981 tax cuts tilted toward the wealthy and made him a supply-side icon. But Reagan could also be fair, and fairness would permeate his last fiscal legacy. In the landmark Tax Reform Act of 1986, nearly three years in the drafting, Reagan again cut marginal rates but raised taxes sharply on investors.

The reform ended preferential tax treatment of capital gains. The tax rate on long-term gains leapt from 20% to 28%, nearly double the current levy. Higher-income taxpayers could pay as much as 31% on their gains.

Reagan hailed the bill as “the dream of America’s fair-share tax plan.” He also called it “the best job creation program ever to come out of the Congress”; hyperbole, but evidence that he expected no growth falloff from higher capital gains taxes. The new 28% rate held until ’97, when a GOP-controlled Congress and a Democratic president fell under the spell of investor-love.

Republican presidential candidate John McCain stays miles away from the fact that Reagan equalized taxes on income from wages and income from wealth. But Barack Obama (and John Edwards, before dropping out) have pointed to it with relish.

In their bones they know what’s fair, just like The Gipper did.