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What is the incentive of the capital gains tax rate?
blaisepascal
Let's say I have $1M sitting in my bank account free and clear. If I invest it in XYZ Corp (selling at $100/share), and wait 6 months until XYZ Corp is at $110, then sell it, I'll make $100K in capital gains, and will owe $25K+ in taxes on that capital gains. "Short term" capital gains are taxes as regular taxable income. On the other hand, if I wait 13 months until XYZ Corp is at $110, then sell it, I'll still make $100K in capital gains, and will owe only $15K in capital gains taxes. "Long term" capital gains are taxed at a special, lower, rate.

My real question is: If there was no long term capital gains rate and all capital gains were treated as regular taxable income, how would I (or other hypothetical rich person) act differently? What social ill is prevented which is worth a 10-20% tax cut?

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I think the theory is that long-term capital gains by a business should incur less taxation, because they will enable the business to hire more workers, increase productivity, and pump more goods into the economy. in practice, of course, it doesn't necessarily work that way...


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