This is very simple, but most people like you are clueless as to the actual facts.
The reason capital gains are taxed at a lower rate is because the money used to buy stocks, bonds or anything like that has already been fully taxed as wages or salary.
You buy stocks with money that has already been taxed at regular rates. You are being taxed twice on the same money. That is why capital gains are taxed lower than salaried income. Make Sense? Or is it just that anybody who has worked hard, and invested their hard earned (and fully taxed) money is somehow evil?
Fact of the matter is pretty much all money in circulation has been taxed at some point or another anyway. Ultimately money paid as salary was initially revenue for the employer which was already taxed. (and that revenue was someone else's income which was taxed, etc...)
And the system is broken anyway. It's very easy for people who are already rich to game it. Those of us who aren't fortunate enough to have millions lying around end up paying more in tax. Let's say I earn $250k/yr. I invest and make a gain of another $20k or so. Guess what, I end up paying my income tax rate (which is 36% or whatever) on that $20k.
Someone like Steve Jobs who had a Ssalary of $1 pays <15% on his billions
Why should his gains be taxed less than mine, especially when I end up earning considerably less?
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This is moronic. Any increase in the capital gains rate will result in fewer people cashing out their gains, which means LESS revenue for uncle Sam.
Rich folk who pay no taxes, are living off of after tax cash they already had in the bank. They will take no salary from their jobs (Steve had a $1 salary as CEO), and instead take compensation in comapny stock which they do not sell, or realize a gain. Whatever other income they have, they offset by write-offs (deductions, charity) so their effective income is in fact actually ZERO. When they do sell their company stock, yes they're taxed at long term (after one year) capital gains rates.
If you want to tax rich people more, all you have to do is implement a different capital gains rate, for those who earned their stock/assets through job compensation.
Here's the thing though. Even if I invest only with what I had saved (and therefore already paid taxes on), my gains end up getting taxed based on what my salary is -- not based on how much I make through the market. I disagree with that policy. It should not be based on my tax bracket, but instead on the amount of money I gained when I decide to cash out.
The only way I can possibly enjoy such low tax rates is if I have enough money saved up that I don't need an income to sustain my life's requirements.
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In addition to what others have said, you must realise that investing isn't a safe process. One is not guaranteed to make a profit. Any effective tax rate on capital gains already makes it difficult to invest, as it (along with brokerage fees, etc.) cuts into the percentage gain. Imagine I've invested $1000.00 each in two companies, and one stock under-performs and I lose money while the other makes me slightly more than I lost with the former. With such a high effective tax rate, I'll end up losing money on the ordeal.
In other words, it makes the risk involved in investing/trading too great for many (or potentially most) people. Plus it will hurt the small-time investors disproportionally more than the large; those with more money have greater access to diversification.
The moment you cash out, the risk is taken out of the equation. I'm not saying one should pay taxes based on how much the stocks are worth. I'm saying one should pay taxes based on how much money they actually gained by the time they decide to sell the stocks. As it stands now, if you realize several million dollars through the market, but your actual salary was very low, you end up paying 15% in taxes.
The guy who earns $100k on salary and earns a modest $25k in the market will pay ~30% on those gains.
Edit: I was thinking of short term capital gains for most of my post. Though even someone with no salary pays 0% on long-term anyway, so I think the point applies. Ideally, the amount you're taxed should depend on the amount you make through the market.
It doesn't take a genius to note that the risk isn't as large as portrayed by some. All one has to look at is how much the overall wealth of the "investor class" grew in comparison with everyone else.
