Scott Sumner on capital gains taxation

You also see the media discuss the “principle” that capital gains should be taxed the same as wage income.  That’s about as sensible as saying that “in principle”, a gallon of gasoline should pay the same tax as a gallon of Scotch whiskey.  Exactly what principle is that?  Capital gains income is nothing like wage income, indeed calling both “income” is nonsensical.  For instance, the real and nominal tax rate on wage income is identical, and the real and nominal tax rate on capital gains is very different.  So if it’s a matter of “principle”, then why should we set the nominal tax rates equal?  Why not equalize the real tax rates?  And if they are merely two forms of “income”, then why don’t we allow full deduction of capital losses from wage income?

A wage tax essentially taxes current and future consumption at the same rate.  A capital gains tax taxes future consumption at a higher rate than current consumption.  What “principle” suggests that patient people should be taxed at higher rates than impatient people—even if they have the same lifetime wealth?

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