There’s been much discussion lately about the rate at which capital gains are currently taxed under federal tax law.  The rate is currently 15%, which is lower than the rate at which other income is taxed. This is making folks focus on the tax avoidance strategies of people who make most of their money on investments, like professional investors and other wealthy people who don’t need to work for their money. The example is usually given that millionaires, who make their money passively through investments, enjoy a lower tax rate than their secretaries who work for a living and pay payroll taxes. The optics of the situation are terrible.  Many people are saying that we should move to a capital gains rate that is the same as the rate on other types of income.  Robert shares this view, as he stated in his November 7 blog post. 

All the politics and the real and important perceptions aside, it is good to talk for a moment about the reason the capital gains rate is lower than the general rate.  Congress did not wake up one day and say, “We want to bestow a huge tax benefit on investors, so we’ll tax their income at a much lower rate than everyone else.”  It’s not that easy.  The reason the capital gains tax rate is lower than the general rate is to remedy the pernicious effect of inflation on investment income.