Here's a link about it:
http://www.ctj.org/pdf/privateequity071907.pdf
Basically, There are 2 broad categories of income - personal services and investment income.
Personal services type is pretty self explanatory. If we perform actual 'work' like being an employee or a contractor doing construction we spend time doing a particular service to earn our money. I.e., working for a living means being taxed at regular rates and SS tax.
Investment income is getting dividends on our money invested in stocks, or interest or capital gains or rents from real estate. So wealth trust funds types can get away with just paying investment type taxes and no SS.
However, if all I do is own a bunch of rental real estate and spend all my working hours managing that, I'm not investing, I'm actually working and my profits rise to level of personal services. Therefor, I pay normal income tax rates like someone who employed or self-employed, plus social security tax (which not charged on investment typ income).
Similarly, people who do stock market trades and spend all their working hours on it are not generally considered "investors" but actually working and the income from it considered 'personal services' income and they pay regular tax rates and SS tax.
So, under the 'normal' tax rules Buffet and his fellow fund managers should be taxed at regular rates and even pay SS tax. However, Congress made a special rule for them so all their income from managing the fund is 'considered' LT capital gains and so taxed at 15% (and no SS tax applies).
What makes this treatment particularly eggregious is that unlike investors fund managers have no 'risk'. If their fund loses money they don't, they still get paid. So how, in addition to the other rules, can they make LT capital gains when their fund losses money is an absurdity.
If you or I spent all day doing stock market trades we would NOT get the 15% capital gains rate (and no SS tax) but these big time fund managers are excepted because Congress gave them special rules.
Fern