In highlighting our broken federal tax code, President Barack Obama has captured something important. Following the law, honestly and without cheating, millionaires and billionaires can pay lower federal tax rates than ordinary working Americans.

That's got to change.

Obama told the nation in Tuesday's State of the Union address that "because of loopholes and shelters in the tax code, a quarter of all millionaires pay lower tax rates than millions of middle-class households."

He mentioned no names, but Republican presidential candidate Mitt Romney just hours earlier had announced that he paid an effective tax rate of 13.9 percent in 2010. That year, 10.4 million taxpayers earning under $100,000 paid more than 26.5 percent in federal income, payroll and corporate taxes, according to a Congressional Research Service report of last October.

Obama is right to pursue what he calls the Buffett Rule, after Warren Buffett, the chairman of Berkshire Hathaway: "If you make more than $1 million a year, you should not pay less than 30 percent in taxes."

In this, Obama is not calling for anything radical, merely a return to policies of the Reagan and Clinton years. The sky did not fall during those years. In fact, people like Romney and Buffett did very well and, especially under Clinton, the economy flourished.

The problem is that under current law, the income that ordinary workers earn from wages is taxed differently than the income that people like Buffett and Romney make from investment profits, dividends and interest. And as Buffett has noted, these folks also pay almost nothing of their income in payroll taxes, unlike most workers – because the Social Security payroll tax does not apply to income above $106,800.

It doesn't have to be that way.

Ronald Reagan signed a tax reform in 1986 that treated earned income and capital gains the same.

During Bill Clinton's first term that rate rose to 29.5 percent.

The drop to a capital gains rate of 15 percent – the lowest since the Herbert Hoover era – occurred in 2003, during the presidency of George W. Bush. We now know about the economic distortions we got out of that – giant asset bubbles in housing and exotic securities.

Surely, we should be able to revive the principle that income from investments should be taxed at the same rate as earnings from work.

Obama has captured the logic of this. When wealthier Americans get tax breaks they "don't need and the country can't afford, it either adds to the deficit, or somebody else has to make up the difference – like a senior on a fixed income, or a student trying to get through school, or a family trying to make ends meet."

Obama announced on Tuesday he was prepared to work with Republicans to reform Medicare/Medicaid and Social Security to make them sustainable in the future, in return for changes to the tax code. They should take him up on that offer.

Getting reforms to the tax code and to programs that meet the needs of our aging population would be historic accomplishments, like the hard-fought bipartisan tax and Social Security reforms of the 1980s.

If political figures as philosophically different as President Ronald Reagan and House Speaker Tip O'Neill could break partisan gridlock in the 1980s, so can Obama and today's House Republicans.

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