Income derived from capital gains is taxed at a lower rate than ordinary income, which is supposed to encourage investment. But Uwe Reinhardt argues that “A major problem with the tax preference embedded in the taxation of capital gains is that the preference is so scattershot, rewarding both behavior that leads to economic growth and behavior that does not.” For example, “the maximum tax rate on long-term capital gains from the sale of collectibles such as coins and art in 2009 was 28 percent – still much below the highest tax rate on ordinary income.”
In terms of reform it, the frustrating thing is that everyone agrees that it would be better to have a progressive consumption tax than a progressive income tax. And yet, nobody does this and there’s no sign of a political move to do it. So if there were to be a major political push toward reforming the tax code, why not reform it all the way?