The New York Times reports without skepticism on the call by Pimco's Bill Gross to increase capital gains tax rates to the current rates on ordinary income. The Times writes:
Mr. Gross was referring to tax breaks that some of the wealthiest Americans receive because they earn their income through investments, which are taxed at a lower rate than regular income. This has led to a yawning gap between the rich and the poor.
The lower rate on capital gains applies not only to "the wealthiest Americans" but to any American who has a long-term capital gain, whether as a result of selling a home or a business or through a mutual fund. The notion that the cause of the gap between rich and poor is the difference between ordinary income rates and capital gains rates is unproven — if one buys the claim that that gap has increased in recent decades, the increase has actually come as the difference between the capital gains rate and the ordinary income rate declined. At the end of the Reagan administration, the two rates were the same, and people were still complaining about income inequality. People are complaining about income inequality now, but the difference now between the top income tax rate and the top capital gains rate is smaller now than it was in the 1950s, the supposed heyday of the middle class, when the top income tax rate was 91% and the top capital gains rate was 25%. There are other possible explanations for the supposed rise in income inequality, such as globalization, that have nothing to do with the difference in tax rates. Without the difference, the appreciation of an asset because of inflation is fully taxable. This isn't really a tax "break," it's just the way tax law is structured so that people don't get taxed on inflation. Some other countries have no capital gains tax at all, and increasing capital gains taxes in the way Mr. Gross suggests would make America less competitive relative to those countries, another point that the Times does not mention.
The Times makes no mention of the fact that Mr. Gross makes his money managing a big bond fund, and that bond interest is taxed as ordinary income. Eliminating the tax advantage of stock funds relative to bond funds would be good for Mr. Gross's business. That may not be his motivation — he may be motivated purely by public policy concerns, or by, as he explains it in his own letter, "guilt." But it is worth pointing out to Times readers nonetheless, the way the Times certainly would if some business executive were advocating a tax cut that would help his own business rather than a tax increase.