Only a few countries impose savings taxes (also known as "wealth taxes"): France, Spain, the Netherlands, Norway, and Switzerland. There might be two or three more that I'm missing. Wealth taxes are intended to prevent the concentration of wealth by essentially forcing a minimum level of capital investment by the extremely wealthy.

In your example, the person who earns and saves $100 is not taxed any differently than the person who earns $100. The saver has not invested any capital (yet), he is simply sitting on the money. Both were taxed at the appropriate tax rates (0% or their applicable marginal rate), so both have the same amount of money. If the saver then invests the money in a capital producing asset, when he later disposes of the asset, he may be taxed on the gain, if any, he recognizes on the income (i.e., the increase in the price of the capital asset over the price he paid for it). If the saver sold the capital asset for the same price, or for less, he is not taxed on the sale--in those situations, he is not treated any differently than the spender. It is only if the saver realizes a capital gain that he is subject to a capital gains tax, and when he is, he pays a far lower rate on that income than he would if he had earned the income (max 20% rate vs 25% rate or higher assuming saver is above the poverty line).

The inflation problem could be mitigated with a structure that takes this into account.

I can think of other reasons that low capital gains taxes are good, like encouraging investment, but the "taxing savings" argument doesn't seem like it works.

IMHO what we really need is a way to distinguish rentier income from investment income derived from investing in growth. The former should be taxed as income or maybe even higher, while the latter should be taxed at a lower rate or not at all.

There is a good case for taxing capital (savings). See Picketty.

Really? Have we really dropped to that point? The Picketty Card?

Piketty's argument, near as I can tell, is merely that we might live in a world where the best way to create wealth is to allow super smart uber rich people to direct nearly all investment [1]. Further, if we allow wealthy people to do this, they won't actually consume the fruits of their labor - they'll allow the rest of us to. Why that's an argument for taxing capital I have no idea.

[1] His book doesn't justify this at all, it merely assumes it. http://www.chrisstucchio.com/blog/2014/piketty_and_inequalit... But he has a couple of academic papers with models that I haven't fully read yet.

If you tax consumption, you might also tax wealth, if a large portion of the income of the economy is concentrated in the hands of those who consume very little. Indeed, that is the entire point of having a wealth tax--to force consumption which can then be taxed.

You have misstated Piketty's argument, as has Chris Stucchio. Piketty's argument is that allowing wealth to concentrate in the hands of a few is the biggest threat to the stability of modern economic systems because it ultimately means that less money is available to everyone else, which restricts growth. He is very much in favor of wealth taxes to force the distribution of this wealth to a wider range of the economy precisely to keep the cash flowing. He's not arguing for capital gains taxes--indeed, he opposes them, and has argued that capital gains should be taxed no differently from ordinary income.

Please clarify. Up to the comma I thought you were saying that he thinks the capital gains tax rate should be zero, but the rest of the sentence says something quite different.

Piketty's argument is that allowing wealth to concentrate in the hands of a few is the biggest threat to the stability of modern economic systems because it ultimately means that less money is available to everyone else, which restricts growth.

This is incorrect. Piketty doesn't make any claims at all about less money (or less wealth) being available to anyone. He claims merely that the ratio of worker income to capital stock will be lower than it otherwise might be. Please, go read even just the introduction to the book.

Further, he hints that that the richest people will have the highest rates of growth of their investments (the book is pretty weak on justifying this, again, academic papers might be better). That means the best way to actually create wealth is to put money into their hands. Note that if the richest people do not have the highest rates of return, then there is no reason to expect wealth concentration. See my blog post which works out the math on this in detail.

Note that I'm actually citing the math in Piketty's book, not his mood affiliation.

Even this reason, however, is probably exaggerated. Suppose for example that the CEO owns 10% of a company's stock. While they have a greater incentive to work hard, there is also no reason to think the stock price will rise faster than any other stock (by the efficient market hypothesis). This apparent contradiction is resolved by that fact that the market already knows that the CEO is incentivized to work hard. So as long as the CEO isn't awarded shares before it is announced publicly, the capital income from these shares should be no different to any other share.

The same applies to startups, however in the case of the startup there is no market signal so it is easier to cheat accounting rules and claim that the value of the awarded shares are lower than they really are.

Why, then, is it inherently true that a government (or other entity) should provide citizens a mechanism to store the means to buy those things indefinitely for free?

Inflation is already the cost to save money.

In the case of VC/PE etc. it can be argued that much of the capital gains are actually income and should have been taxed as such to start with - lets face it most partners in those businesses are risking other people's money rather than their own anyway.

Problem I have with tax is we tax people on their income rather than their wealth so people with low incomes regardless of their wealth pay lower taxes.

Furthermore, I don't see how we can justify having a very low interest rate set by the federal reserve in the interest of encouraging investment, but then decide to tax capital gains more which would discourage investment. However, trying to make any sense of our tax system is probably not a fruitful endeavor :)

We all have a general sense of what each category refers to, but there are a lot of edge cases where it's difficult to say whether it's one or the other.

If I'm a day-trader, buying and selling stocks, and making a living on this, is the profit income or capital gains? If we go by the logic that one shouldn't pay the same tax twice, then it's capital gains, because income tax has already been paid on the money used to invest.

I'm not saying this is the wrong conclusion -- that the income of day-traders selling and buying stocks should be taxed as capital gains -- but it seems to me that this constitutes favoring one profession over another.

Surely, if I earn my living buying apples cheaply and selling them for more money, my income would be taxed as income, and not capital gains. So why should income from selling and buying apples be taxed differently than income from selling and buying stocks?

Again, I don't claim to have the answer. It just seems like a hard problem to me.

This is not an edge case; it's a well-settled point of law.

Capital gains are related to the disposition of assets intended to be held for investment. Stocks are generally such assets and the disposition of stocks results in capital gain income (or capital losses). Apples are not intended for investment; they are intended for consumption. Ergo, the sales of apples results in normal income. (Note that for stockbrokers, stocks are also treated as inventory because by definition they are not in the business of holding stocks for investment.)

Buying and selling stocks as a day trader is not the type of capital trading that governments want to incentivize, so they treat income arising from this type of activity as "short term capital gains." In most countries, including the US, short term capital gains are taxed at the same rates as normal income, which is the scenario that would apply to your day traders. Consequently, the day traders and apple sellers are taxed in essentially the same manner.

It is only if capital assets are held for a sufficiently long period of time (in most countries 1 year, though in some countries as little as 6 months) that the true capital gains rates apply. This is where the day traders may come out ahead--if they hold on to some of the stocks traded for at least 1 year.

Wheat is also intended for consumption, but it -- as with many other goods, consumable or not -- is also a commodity that is traded.

I realize I may have pointed out some edge cases that weren't actually edge cases. I am not a tax attorney, so I don't know what the law says.

I am only trying to point out that determining what is income and what is a capital gain is a hard problem, even though laws exist that try to put various activities into one of the two categories. The US uses an arbitrary 1-year limit, while the tax code of my country of residence (Denmark) says the tax rate is determined, not by how long the assets are held, but by trying to determine whether the profit constitutes ones primary source of income. If the answer is "yes", it's taxed as income.

So different countries use different methods to solve this problem of discerning income and capital gains, but I still maintain that it's a hard problem, that has not been solved adequately anywhere. And that there are many edge cases, resulting from current law, that are counter-intuitive.

I'm not certain, but I think that the long-term rates could apply if you held your apples for more than a year.

If you make $500, then pay $100 in income tax, you're left with $400.

If you invest the $400 in a stock and sell later for $500, you're not taxed on the $400 you've already made (and were taxed on), you're taxed on the $100 capital gain, which you haven't paid taxes on.

Or am I misunderstanding things?

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Further ... Is your argument is that once a pool of money has been taxed, that pool of money should never be taxed again? If so, does that mean you don't believe anyone should pay sales tax on anything they've purchased (since they're purchasing it with post-income tax dollars)?

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Lastly, you mention that if "someone has a large pool of wealth, then they have already been taxed when they earned it". This is not necessarily so thanks to dynastic wealth, an issue others have brought up in other comments.

The issue is exacerbated when someone inherits wealth (and pays little to no taxes on it), then invests it and has a capital gain of say $40k -- enough to cover basic living expenses in many parts of the country for a year. That person's tax rate is lower than a person who worked for an employer and made $40k. The question is, why is the government incentivizing this through tax code?

In a low-inflation environment this wouldn't make much difference, but in a high-inflation environment (like the 1970s) it would make quite a large difference.