Income from capital has a low tax rate in the US (and many other countries) because you can deduct neither losses due to inflation nor losses due to risk, both of which are substantial for capital income but non-existent for wage income. The lower tax rate is simpler than actually accounting for these differences.
Treating wage and capital income equivalently would require recognizing losses due to inflation and risk that simply don’t exist in a meaningful way for wage income. Taxing them similarly without very negative consequences requires recognizing these differences in some fashion.
Taxing wealth has myriad additional problems. In the US, about 2/3 of wealth is completely non-liquid so any theoretical valuation is fiction and highly leveraged.
>Treating wage and capital income equivalently would require recognizing losses due to inflation and risk that simply don’t exist in a meaningful way for wage income.
Learning that their wage income makes them immune to inflation and is risk-free seems like it may be surprising news to many Americans.
Inflation kills your wage much more reliably than wealth. If anything, the exact opposite of what you're saying happens: wealth has much lower risk from inflation, because the nominal price of the actual assets that your wealth is composed of often increases with inflation (e.g. land value). In contrast, wages are 100% affected by inflation - unless you put in the extra work to get a raise, the buying power of your salary is guaranteed to decrease year over year.
> losses due to inflation nor losses due to risk, both of which are substantial for capital income but non-existent for wage income.
Neither is true.
The only asset class directly hit by inflation is cash. No high net worth person in their right mind holds substantial cash for a longer period of time. If they do, it's a conscious choice and it's not clear why the tax system should help in that situation.
The risk of a wage earner is to lose their employment because the business folds. Just like the shareholder in that business. It's again unclear why the tax system should compensate both differently for this.
Capital gains taxes are assessed on nominal gains not real gains.
If I bought $100K of stock in 1999 and sold it in 2026 for $200K, I gained no real wealth from that transaction. What I could purchase today for $200K could have been bought for $100K in 1999 because of inflation.
Yet, I’d owe capital gains on the $100K of nominal gain I experienced. This is part of the reason that long-term capital gains are taxed at a lower rate than ordinary income.
> If I bought $100K of stock in 1999 and sold it in 2026 for $200K
This is because you invested incredibly poorly. The S&P is up ~500% over that period, plus decades of dividends.
Long-term capital gains are taxed at a lower rate because rich people have more influence over the tax code than people who earn most of their income from working.
> In the US, about 2/3 of wealth is completely non-liquid so any theoretical valuation is fiction and highly leveraged.
That may be the case but it doesn't prevent anybody from borrowing against it, which turns that fiction and illiquidity into very real liquid dollars. That same mechanism could be used for paying your taxes as it reveals that this is merely an excuse.
> Income from capital has a low tax rate in the US (and many other countries) because you can deduct neither losses due to inflation nor losses due to risk, both of which are substantial for capital income but non-existent for wage income.
You are incorrect on both of those, the risks are obvious.
If you wage/salary does not keep up with inflation, you lost buying power due to inflation.
If your employer goes out of business or your industry suffers a downturn, you may be laid off and lose your income. This risk is highly concentrated due to most people only having the one job.
Wage earners are exposed to all kinds of risk.
Also, equities go up when there’s inflation and if you hold bonds to maturity, all you miss out on is potential interest income in an inflation event. Rents go up with inflation. Cash and cash wages have the highest inflation risk.
Treating wage and capital income equivalently would require recognizing losses due to inflation and risk that simply don’t exist in a meaningful way for wage income. Taxing them similarly without very negative consequences requires recognizing these differences in some fashion.
Taxing wealth has myriad additional problems. In the US, about 2/3 of wealth is completely non-liquid so any theoretical valuation is fiction and highly leveraged.