There's a widespread belief that the lower tax rates of capital gains compared to ordinary income in the US is "unfair".

But this is wrong. The simple reason: capital gains taxes (as well as taxes on interest and other returns to capital) are double taxation. Perhaps more meaningfully (in response to the inevitable "isn't all taxation double taxation?" retort), they tax future consumption at a rate above that of present consumption, while still taxing labour. Even if you want the tax system to remain similarly progressive, you could achieve this without unnecessarily taxing the profligate over the frugal (such as via a progressive consumption tax).

I would have come up with my own analogies to further my point, but others have done a better job of it already.

A simple example showing how capital gains taxes are double taxation

Landsburg's other posts on the subject are also worth reading.

A thorough and illustrative analysis of how the notion of "income" is misleading.

To show that this isn't just some right-wing plot to give more money to rich people, here's progressive blogger Matthew Yglesias arguing against the standard Democratic line:

Here's an ungated academic paper (warning: technical) on why the efficient tax on capital is zero.

But what about those hedge fund managers who get to pay lower tax rates on "carried interest", subverting any need to pay ordinary income?

LDO

It doesn't matter, this will instantly turn into a "WHY DO YOU HATE POOR PEOPLE" emotionfest.

Nice OP, but consensus on this forum seems to be taxing capital gains at 75% because it's like free money for rich scum.

Even actual socialists in France know this.

I get paid via food stamps. Your capital gains are double taxed, then shipped to me and I have to pay taxes when I use it. The real crime is me getting triple taxed.

Corporations are people, my friend.

Just relax, there are plenty of people here to shill for those more fortunate than they.

So predictable I was going to post it and preemptively rebut it, but anyway.

"Double taxation" is somewhat of a misleading term, which I alluded to. It's not about "a dollar being taxed once and then taxed again" - all dollars have been taxed many many times, yet for some reason people aren't facing effective tax rates of near 100% for normal consumption, while they clearly do face higher effective tax rates on savings as illustrated by these examples. It's about the incidence of these taxes.

Imagine I own a store that sells widgets, which share the average properties of all goods sold in the country. There is a flat income tax of 20%. I earn $50,000 a year, paying 20% in taxes, leaving me with $40,000 a year. The government then announces a tax increase to 30%. How much does this affect me? Well, some people's taxes will go up with no compensating gains, leaving them with less money to buy widgets. But the government presumably does something with the extra revenue it raises, perhaps giving transfer payments to some people (who can buy more widgets) or directly spending it (some of it on widgets). It all depends on what happens to AD - it could go up if the spending has a stimulative effective, or down due to the deadweight loss of taxation. Let's assume the net effect is zero. In that case, I still make $50,000 a year pre-tax a year, but my post-tax income decreases to $35,000. I am not "doubled taxed" as a result of other people's taxes increasing. However, as the other examples show, I am double-taxed by taxes on savings.

In any case, the "double taxation" rhetoric is tangential to the point that capital taxes unnecessarily distort inter-temporal consumption choices when equally progressive taxation schemes exist without this flaw.

My prediction was nittery about tangential points and snarky one-liners that miss the point. Thread succeeds thus far.

Why does the OP seem to state that saving=investing?

Also, probably more like "WHY DO YOU WANT TO GIVE FREE MONIES TO RICH PEOPLE?"

the problem is, capital gains taxes are *not* double taxation. they are not unfair, or evil, or anything else. income generated from investment .

Please read the second link as to why income is a flawed measure of economic inequality.

the big question is , how will the govt replace that money ? we are talking big sums here, and the way they have budgeted things , tax receivables collected are at a premium .
the tax rate on long term capital gains have already been lowered. your idea will NEVER happen.

Disagree strongly with the OP. Will elaborate when I have time.

New scenario for you:

Bob inherits $1,000,000 and invests it while never working a day in his life making a gain of 10% over a year, his income is zero and all his money comes from capital gains and the tax on capital is now zero.

Alice works hard each day and earns $100,000 is taxed at 50% and spends it all right away.

What does the tax code cost Alice? Answer: 50% of her consumption (which is down from a dollar to fifty cents). What does the tax code cost Bob? Answer: 0% of his consumption.

+1 , also, does OP want to eliminate short term and lt capital gains tax?

if both, even my sick grandma will become a daytrader.

Seems like the premise is that because you were taxed initially at 50%, you cant invest what you could have, and the opportunity cost of the missed investment is being described as a tax on future capital gains equal to the wage tax. Is this correct?

please understand that economists are not scientists. they have no way to test/prove/disprove anything they say. they cannot be held accountable to facts, and work only in the realm of theory.

This looks like a stupid math trick to me.

In the first Stevan Landsburg example that OP posts, Bob is making $1.50 total, not $2.00. He makes $1.00 through work and then another $0.50 with his investment. There's no reason to count the investment amount again because it's not taxed, only the GAIN is taxed. So in reality Bob is only being taxed $0.55 of $1.50 in income which is 36.7%. Of course Alice is still being taxed at 50%.

The "percent of consumption" thing doesn't make sense to me. It shouldn't matter HOW you are making your income. If you make an extra $0.50 using your post-tax income, that's your choice. It's still new income and it should still be taxed at the same rate.

OP - Am I missing something? Why am I wrong?

This is what I thought as well. It seems like he's counting the fact that bob could only invest 50 cents instead of his whole dollar, so he only made 1/2 of what he could have on his investment, and concluding that this is equivalent to a 50% tax on his capital gain.

Sustainable Revenue >>> Means of taxation

So should we punish people for saving money to give to their kids or friends when they die?