Why are "capital gains" taxes so much lower than taxes on other income? The reason capital gains taxes are lower is because most of the income of the rich is from capital gains. And the reason most of the income of the rich is from capital gains is because capital gains taxes are lower.
"Capital gains" are the gains, or profits, made from the investment of capital -- the big pools of money that a few of us have the great responsibility and burden of being stuck with. The theory is that the few among us who have bundles of money (capital) use that money to start businesses or buy stocks or property (or race horses) and thereby "create jobs." (For more on how businesses and the wealthy "create jobs," click here and then click here.)
If the value of the business or property (or race horses) goes up those wealthy few make even more money (gains). This ability to obtain these huge gains is a benefit offered to those who have lots of money in the first place. Thus the term "capital gains." These gains are differentiated from the gains the rest of us make from ... working ... because the rest of us do not have the intelligence and wisdom of having those huge pools of money to invest.
In our system the income gained from these investments by these wealthy few is therefore taxed at a special very, very low rate, because they have the wisdom and intelligence to have large sums of money available to invest, and the rest of us do not. This low rate is considered an "incentive" to those who have these large accumulations of money, to try to persuade them to make these huge profits. They require these "incentives" to make huge profits, because otherwise they might not be interested in making the huge profits that can result from owning most of the property and stock and race horses (and yachts and private jets and multiple homes and million-dollar cars.) So that is why they must be given the incentive of these very special low tax rates - to persuade them to make investments that reap huge profits that they otherwise would not want to make.
Of course, the wealthy usually complain when government gets involved in creating "incentives" and "picking winners and losers" in ways that help We, the People, saying government interference distorts decision-making. But when the "incentive" is special low tax rates to persuade the wealthy to invest and make huge profits, that's different. Because it is, that's why. Shut up. Hey, look over there!
This reaping of huge profits from "efficiencies" like downsizing, laying people off and making the remaining workers do 2 jobs each in the same amount of time, outsourcing, buying companies and firing everyone and then selling off the pieces, offshoring, force reductions, firing people and then bringing them back as "contractors" at half the pay, relocating factories out of the country where people don't have the protections of democracy, replacing workers with machines, etc. is called "creating jobs."
Effect Of Cutting Capital Gains Taxes
In 2001 these special low tax rates for the very rich "job creators" were made even lower. This was done in order to provide even more incentive for them to make even more profits from their large accumulations of property, houses, cars, yachts, private jets and race horses, so that these "producers" - the "job creators" - would produce even more and create even more jobs. (Click here for more on who and what really creates jobs.) The result of these 2001 tax cuts was spectacular: eight years of the lowest economic growth and lowest job-creation rate since WWII, followed by the collapse of the entire financial system and mass layoffs of millions of us.
So the 2000s brought upon us an even greater need to provide incentives for the producers to create jobs! In fact, each time these incentives are increased and jobs do not result there is even greater pressure to provide even more incentives to the "job creators." A great system, this, if you're already rich, no? The worse things get, the more you get, because you had the wisdom and intelligence to be sitting on a huge pile of cash. Brilliant! (See Did The Rich Cause The Deficit?)
So with all this in mind, today the Washington Post looks at these super-low tax rates for those who have large accumulations of money, in Capital gains tax rates benefiting wealthy feed growing gap between rich and poor,
For the very richest Americans, low tax rates on capital gains are better than any Christmas gift. As a result of a pair of rate cuts, first under President Bill Clinton and then under Bush, most of the richest Americans pay lower overall tax rates than middle-class Americans do. And this is one reason the gap between the wealthy and the rest of the country is widening dramatically.
[. . .] Over the past 20 years, more than 80 percent of the capital gains income realized in the United States has gone to 5 percent of the people; about half of all the capital gains have gone to the wealthiest 0.1 percent.
Repeat, "about half of all the capital gains have gone to the wealthiest 0.1 percent."
The Washington Post story explains the strongest reason why it is so important for legislators to pass these lower tax rates to "incentivize" the wealthiest to invest and make huge profits:
Some lawmakers who have backed low tax rates on capital gains have later been hired by the financial industry.
So you see, it is very clear why it is very, very important for members of Congress to make sure that there is a special very, very low rate of taxation for the wealthiest few. And the result?
The 400 richest taxpayers in 2008 counted 60 percent of their income in the form of capital gains and 8 percent from salary and wages. The rest of the country reported 5 percent in capital gains and 72 percent in salary.
Yes, that is the very same 400 wealthist who have more wealth than 60% of all Americans combined. (That's right, I had it wrong when I wrote that it was more than 50%, it is now more like 60%.)
So here is how it is: the rich are rich because they are smarter than the rest of us. And what is the proof that they're smarter than the rest of us? That's easy:
Because they're rich!
Take a moment to browse a collection of pictures of the job-creating results of these special exemptions from taxation enjoyed by these wealthiest, in Nine Pictures Of The Extreme Income/Wealth Gap. And read more about the ideology behind this idea that the wealthy are "producers" who "create jobs."