| > Capital gains taxes are lower for a specific reason: the capital that was initially invested was already taxed. That is not a sensible reason for capital gains (which apply only to gains) to be taxed lower, since the gains have not already been taxed. It also doesn't explain why the reduced rate (compared to “regular” income) applies to long-term gains, since the original capital was taxed regardless of whether the gain is long or short term. The best fairness-grounded argument I’ve seen for reduced LTCG taxes is that, in a progressive annual income tax system treating gains earned over multiple years but realized at the end as single-year income at full tax rates overtaxes compared to what would have occurred if the income was spread out over the time it took to accumulate before realization, unless the recipient would already have been at the max marginal rate every year before the gains at issue were considered. This is a valid point, but allowing free voluntary advance tax recognition of income and deferring tax recognition after realization for windfalls (say, spreading amounts above the middle actual realized income of the last three years over up to ten subsequent years) deals with that problem more comprehensively (not just for capital income) without undertaxing those who would be at the maximum marginal rate even without the particular long-term gain, or who are continuously rolling out long-term gains year after year repeatedly. Favorable LTCG rates are a way to use a poor approximation of fairness for middle-class earners with occasional long-term gains to sneak in wildly favorable treatment forn the super-rich, instead of just treating income fairly all around. (There's also a trickle-down economics argument for low capital gains rates, that is not fairness-grounded: “we want to encourage the already rich to invest and make more money, because positive side effects of this will trickle-down on the lower socioeconomic classes”.) |