[jandrewrogers]

Short-term capital gains are already taxed at income rates. Long-term capital gains are lower in part because they are not inflation protected, which can substantially discount the real returns. Having a lower tax rate is simpler than computing inflation-adjusted returns for every long-term transaction. For example, if you buy an asset for $500k and sell it for $600k ten years later, you actually lost money after adjusting for inflation but you still have to pay taxes on the $100k capital gain.

Another factor is that long-term capital gains taxes are much less efficient than income taxes in terms of adverse impact on the economy. If you need to raise additional revenue, it is better for economic growth to take it from income (or sales) than capital gains.

[Drbble]

That's silly. The government does lots of inflation adjustments andbracketing and phaseouts in financial programs already. And "long term" starts at two years, where inflation is just barely relevant.

[jandrewrogers]

That is factually incorrect. In US dollars, investments lose 2-3% of their value annually due to inflation, compounded for multi-year investments. In most cases, there are no adjustments for that in the US tax code. For long term investments this has a large, material impact on the expected return on investment. Any accountant worth a damn can figure this out for you and anyone investing takes it into consideration. This includes investors in startups.

Investing in startups returns a couple points over investing in boring things like corporate debt and startups have higher risk. Unless you think more social good comes from investment in corporate debt than startups, it would be foolish to incentivize everyone to ignore startups because the risk adjusted returns are better elsewhere. I accept that some people think investing in startups is a waste of money but I would prefer that our tax code does not force that to be the case.

[jusben1369]

That's really not the reason short term and long term are taxed differently. It's based on a perceived notion that we want to reward long term investment as a preferable activity over shorter term speculation.

[jandrewrogers]

I agree, this is partly the case. There are a number of incentives in the capital gains tax code beyond the well-known ones that are structured very much for the benefit of long-term investments in smaller companies. There is no rational tax basis for this benefit except to benefit small companies.

The argument about inflation adjusted returns is really the baseline case. Most investors account for it. However, they also adjust for risk as well. I would prefer investments in tech startups to be attractive, net, after accounting for the tax code relative to boring investments like debt instruments.