Word: taxing
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Dates: during 1980-1989
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Although they are now ostensibly taxed at the same rate as other income, capital gains already get favored treatment in two ways. First, they are only taxed when an investment is sold, unlike interest and dividends, which are taxed every year. An ideal free-market tax system would leave an investor indifferent between, say, a savings account paying 10% a year and a stock expected to rise 10% a year. But tax-free compounding means that, for a top- bracket taxpayer the after-tax profit on the stock will be 45% bigger after 20 years...
Second, most capital gains are never taxed at all! There is no tax when the owner dies before the asset is sold. The profit on inherited property is measured only from the moment it was inherited. This is a huge loophole, costing the Government more than $5 billion a year in lost revenue...
...current tax system discriminates against capital gains in one way: it ignores inflation. If a stock has doubled during a time when the general price level has also doubled, the real profit is zero, but you'll pay a capital- gains tax anyway when you sell. Of course, the same is true of interest -- an 8% return on a money-market fund at a time of 5% inflation is really only 3% -- but no one is proposing to do anything about that. Furthermore, no one is proposing to limit the deduction for interest paid. In a world with no taxes...
...other factor makes capital gains different from other forms of income: you can generally choose when to take them. In a world with no taxes, an investor would trade one investment for another whenever he or she thought the new one would be more profitable. In the real world, people hold on to investments they would otherwise trade in order to avoid paying the tax. That makes the economy less efficient. A tax break for capital gains would reduce this so-called lock-in effect. (Although, please note, this is exactly the opposite of one argument usually heard...
From a free-market perspective, then, there is no justification for a special tax break for capital gains. If advocates of a capital-gains break wish to concede that they are socialists engaged in large-scale Government intervention in the economy, we can start again from the top on that basis. Of course, if we're talking socialism, it will be a lot harder to avoid the fairness issue...