[smsm42]

One of the reasons why it makes sense to have different rules for investment income is investment income tax (at least if you're investing in a corporative stock) is a double tax - the corporation you invest in is taxed on its profit (so your income from it is less than it would be) and then your income from it is taxed again. It kinda makes sense that parts of the double tax would be less than the single one.

Of course, there's a political component of it too - taxes are always political, and are used to promote or suppress certain actions. I guess the government does want to promote long-term investment and thus defines lower tax rates for this activity.

[JamesBarney]

This is only true of dividends. But I don't think it wasn't true of stock buybacks.

Also there is plenty of business income that is not double taxed because it isn't run through a C Corp.

Then in regards to incentives. We already have interest rates to adjust the knobs of investment versus consumption. Capital gains is just a way to make the tax system less progressive.

[blumenko]

Stock buybacks come from profits which are taxed, and those who sell the shares back to the company also have to pay capital gains tax. And S corp income is taxed at personal income rates, not capital gains rates (except for some ridiculous 20% rebates in some situations in the new tax law (but is still higher than capital gains)).

[JamesBarney]

You're right. I had a brain fart forgetting that buybacks are taxed as profit.

[esrauch]

There's no reason the government wants to promote long-term investment over income-producing labor, is there?

[smsm42]

There is. Basic level of labor is almost always there - people have to work to earn the living (even if you go into crime, you still have to work - maybe you pay taxes to different people and do different things, but you still have to do stuff to earn your money).

However, once you earned enough money, beyond subsistence level, you have a choice - you can spend it all on consumption, or you can defer some of the consumption, or give up a part of it, as an investment, in hope that this would increase your consumption abilities in the future, or you ability to retire, etc. Modern economy would not work without investment - you need massive upfront spending to lift off something like Netflix of the ground, before it starts being profitable.

This investment is, ultimately, financed by people who chose investment over consumption (might be one very rich person, or tens of thousands of not so rich people giving their money to the bank, which in turn loans it to the entrepreneurs, or likely a mix of both). Ensuring this choice remains a viable and attractive one is something that the government would definitely have an incentive to support.

[anigbrowl]

This is predicted on the unstated assumption that everyone starts out from about the same place and subsequently people make a variety of different choices. It ignores the effect of inheritance or the costs of increasingly binomial wealth distribution.

[smsm42]

At least in the US, old money effects are not as huge as one would think. Of course, everybody knows about Donald Trump, and maybe other people with inherited wealth, but there's also the survivorship effect - if somebody had rich parents and spent all the wealth how likely you to read about him in the national press? Nobody cares about those.

Moving onto more statistical approach, this one: https://www.fa-mag.com/news/most-millionaires-self-made--stu... says only 8% of millionaires inherited their wealth. For billionaires, according to this: https://www.entrepreneur.com/article/269593 18% got a jump-start (maybe parents were mere millionaires, but the child became a billionaire), and 62% are self-made. So inheritance effects exist, but maybe they are not that huge? At least, clearly, not a majority.

Of course, not everybody starts in the same place. But human behavior and motivations are similar, and thus you can reason about them despite the differences.

[zdragnar]

Labor doesn't necessarily generate income. Factory workers are an up-front cost converting one set of resources into another. No income is realized until that second set of resources (i.e. products) are actually sold.

Also, realize that the government does promote both labor and investments, just through different means. Lowering taxes isn't going to affect how a fully employed individual produces labor; they are trading their time for money. Lowering taxes on investment will promote more investments, since the money for those investments have already been taxed, and since the trade of investments is money-now for money-later, taxes have a much more significant influence over the extent to which someone will invest in a business. Someone fully invested in other things (non-stock commodities, etc) might move some of their investments into businesses instead.

[anigbrowl]

I'm all for simplifying the tax structure but one kind of income should not be privileged over another.