My uninformed-by-ever-having-been-a-tax-lawyer sense is that loss offsets for the capital gains tax are worth a great deal to some investors. Sell your winners to coincide with selling some losers and claim a net gains income of zero or very low. Let the asset winners ride and they will end up in your bequest and have their taxable values reset upon your death. If your option values line up the right way, you have enough diversification, and you are not liquidity constrained, it seems that for many people the de facto rate of capital gains taxation is not 15 percent but rather close to zero. (Maybe not quite zero in expected value terms; it’s tricky because if the losses exceed the gains you can deduct only $3000 of the losses from regular income but on the upside you’re taxed all the way. On the other hand, you can offset with charitable deductions.)
Let’s say we raised the book rate of tax on capital gains to forty percent. For some people the net real rate of tax on capital gains could still be zero. For other people it would be forty percent.
Let’s say we raised the book rate of tax on capital gains to eighty percent. For some people the net real rate of tax on capital gains could still be zero. For other people it would be eighty percent.
Under which of these scenarios have we equalized the tax rates on capital gains and labor income?