[prostoalex]

During low-inflation years - no.

The lenient rates were introduced during high-inflation years. If somebody was pursuing a long-term project spanning over several years (let's say, building a new apartment complex), high punitive tax rates at liquidity time (let's say, 5 years down the road) combined with decreased buying would obliterate any real profitability.

The 12-month cut-off window, though, seems completely arbitrary.

The argument is kinda moot anyways, as capital gains are completely voluntary - one sells when they want to sell. If they don't want to sell, but need liquidity, they can access a bunch of asset-backed loans (HELOCs, PALs, cashout refinance, etc.) Ken Fisher in his book "Debunkery" (and I'm sure the data exists elsewhere) shows how total revenue figures collected by US government do not change over decades, regardless of the actual capital gains rates.

[ericd]

This is a very interesting point. It seems to me that we should tax capital gains at normal income rates, but only after adjusting the cost basis for inflation. It’s a little insane that we pay tax on the inflation adjustments for TIPs and other supposedly inflation neutral instruments, which all but guarantees that they lose money every year.

[prostoalex]

Yes, incorporating inflation sets the stage for increasing the capital-gains tax.

I am not sure what the counter-argument to that is, but one thing I can think of is increased complexity of a tax return for an average joe investor, who bought and sold a few funds in his portfolio. Opponents will also likely point that an official measure - CPI - can be manipulated for political purposes.

[ericd]

Hm yeah. I'd say that CPI is already manipulated for political purposes. Not sure if this would exacerbate it.