So inflation + capital gains taxes serve as a brake against spiraling wealth growth, and that's a good thing for the economy.

While I agree that being taxed on inflation is unfair, it would not be that hard to discount inflation when assessing taxes. Surely a tax system could accommodate that.

But the fact is, it doesn’t and that’s the world we live in. We need to lower capital gains taxes sometime in these next few years.

The fact also remains that the world we live in doesn’t have a lower capital gains tax rate. If we’re going to propose tax changes for the future, all proposals are as good as any other.

I didn't know what part of the world you mean, but in the US the capital gains rate maxes out at 20% for people earning over $425,000 a year and that's pretty darn low.

The question to ask is why capital gains tax should be lower than taxes on wages? If encouraging work is the priority, it should be the other way round.

Not exactly. Long-term capital gains in the US max out at 20%. Short-term capital gains (those investments held < 1 yr) are taxed at your marginal tax rate, which can be significantly higher than 20%.

https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rate...

perhaps the priority is encouraging investment into capital.

Norwegian capital gains tax (no distinction between short and long term) is 30.5% for 2018, with an additional 0.85% of total net worth (mostly minus value of primary residence). I wish lowering capital gains tax was on the radar; if inflation starts increasing then this will be an excellent system for punishing people who have saved money rather than spending it immediately.

Income is income. Why should unearned income get taxed lower than earned income?

Because unearned income is a lot harder to make.

At a 6% return, you need around $800k+ to get the equivalent of a $50k salary before taxes from the interest earned on your savings. When you factor in having to reinvest some of your returns to beat inflation and make up for some years of low or negative returns, you might only draw maybe $20-25k out of that $800k portfolio. Then you get taxed on it at 20% capital gains along with any state taxes, and it all adds up to a lot less money to live off of.

Most people who want higher capital gains do not have a portfolio of this size nor have they explored the reality of living off a portfolio of this size. Work to the grave I guess.

> Because unearned income is a lot harder to make.

You realize that 50k salary is rather close to the median individual income in the US, right? Why should the fact that you've got 800k making money for you mean that you should be taxed less than someone that earned their 50k through wages and tips?

Edit: Another way to think about it: Both the investor and the wage earner added value to their respective markets which was valued by their markets at 50k over the year. Why should one of these market actors be taxed lower than the other?

> Why should the fact that you've got 800k making money for you mean that you should be taxed less than someone that earned their 50k through wages and tips?

the lower rate of taxation incentivizes one to invest that money in legit investments, rather than spend it on discretionary consumption or invest it in an illicit vehicle that provides an untaxed return.

> Why should one of these market actors be taxed lower than the other?

I personally don't think they should but another way of looking at it is that people usually have to work (the enormous pile of cash came from someone somewhere, even if it wasn't the person who has it now). so theres no incentive for the government to cut the worker a tax break. but when you have money in the bank you can do many things with it. a lower capital gains tax allows the government to earn some revenue on the money and helps keep that person from spending it all on fun stuff and driving up the cost of resources with 800k worth of bids.

> Why should one of these market actors be taxed lower than the other?

my prevailing theory is the common belief that an investor's money brings in more economic knock-on effects, and the $50k earned by the wage earner is less "powerful". in order to incentivise the investor, they are given a tax break.

this isn't helped by the fact that those in position to make this sort of tax law are also beneficiaries of said law.

I don't see people passively living off their investments (that is taking a rake while contributing nothing productive to the economy) as a thing to be encouraged, beyond perhaps a retirement age (which has tax shelter status for a significant amount).

As a thought experiment imagine if everyone did this, or it was everyones goal.

If everyone could afford to retire early then this would imply both impressively high productivity while working and an impressively low level of inequality. Seems like a good goal to shoot for?

If everyone was doing it, there would be no returns or even negative returns, and thus people wouldn’t invest. The problem fixes itself.

if there's any segment of the market that's zero sum, then some gains are at the loss of others, and eventually, some actors will fail, leading to an in equality that mimics today's.

If you are talking about retirement, then we have many ways to help mitigate these losses; Roth IRAs or 401ks will let you take money out tax free, and traditional IRAs or 401ks will let you put the money in tax free.

If you are talking about non-retirement people, I don't expecting to live your entire life off of 800k in savings is realistic or something we should encourage. We need people working and producing things.

I’d go a step further and classify income as:

1. Earned income 2. Investment income 3. Gambling/lottery/short term income

Tax rate should increase as you go down that list.

Why?

I believe the reasoning behind it is to incentivize long-term investing.

Though, it should really be a tiered system in that case - different tax rates for holding periods of <1 yr, 1-2 yr, 2-3 and so on, instead of just <1 yr & >1yr

It's one thing to lower tax on investment income. But the problem with capital gains taxes is that they don't just cover investment income, they also cover lots of earned income. Stock options, IMHO, should never be taxed as capital gains since they were "purchased" largely with an employees time. And they're not the only form of capital gains that derive from selling your work product. If we are to cut capital gains, we also need to restrict capital gains to pure financial investments and ensure that every form of compensation for work is taxed as normal income.

Why are you singling out capital gains? Your argument works equally well for labor-based income, but capital gains are already taxed much less than labor.

Labor is taxed year-by-year so inflation does not have much influence on it. Capital gains tax taxes the sales of things (capital) that might have been held for decades. Buy a piece of land and hold it for 20 years. If inflation is 3% then the dollar value will go up by a factor of 1.8 without any real increase in value but if you sell it you will get taxed on that inflation created gain. Some see that is not "fair". That is the spin, anyway.

I think the way to mitigate this problem is to index capital gains to the CPI and then tax gains like income. This cleans up the tax code quite a bit, stops favoring capital over labor, and balances out the pressure on the CPI with having a powerful group of people wanting to have it go up. At the moment CPI is probably under-reported and keeping social security and other inflation adjusted things lower than they would be otherwise.

I don’t think CPI needs to be used to mitigate the problem of taxing inflation on assets. It would just increase the politicization of CPI, which is already not realistic.

The market can easily adjust prices for assets to factor in the cost of inflation and taxes.

No. If I pay you $1 and you get taxed $0.5 you are still $0.5 better off than you were before. If inflation raises you salary to $2 and you get taxed $1, you are still one (inflated) dollar better off than you were before you were paid.

But if you buy a stock for $1 and it goes to $2 as a result of inflation, you get taxed $0.5 on the $1 gain, but your resulting $1.5 has less purchasing power than the $1 you invested.

Everyone would be in the same boat, so I don’t think you would lose any purchasing power as it is relative.

There isn’t enough time between labor being performed and it being paid for inflation to have much effect. Long term capital investments have plenty of time for inflation to pile up and distort the naive calculation of “gain”.

I see your point, but it seems to rest on the rest on the way we determine when capital gains are realized. Capital gains accumulate regularly just like other sources of income; in my mind the tax obligation is incurred at the time of the gain, just like the tax obligation on other income.

For practical reasons the state does not demand the tax until the accumulated gains have been realized by selling the asset. This makes sense for illiquid assets like stock in your private startup, but I don't think it should change the calculation of when the tax was incurred and how much. For liquid assets like shares in public companies, I think it would actually be perfectly reasonable to demand the tax on unrealized gains.

Doesn’t that mean you just need to take more risk?

Is this accurate? If that was the case then interest from savings accounts and CDs wouldn't be taxed at the marginal tax rate as ordinary income is.

Interest from saving accounts and CDs is "ordinary income". "Ordinary income" generally is anything that is not classifiable as a "capital gain". "Capital gain" is gain from the sale or exchange of a capital asset. See https://en.wikipedia.org/wiki/Ordinary_income