Business Adventures: Twelve Classic Tales from the World of Wall Street

by John Brooks

For one, there is a respectable economic theory that supports a complete exemption of capital gains from income tax, the argument being that whereas wages and dividends or interest from investments are fruits of the capital tree, and are therefore taxable income, capital gains represent the growth of the tree itself, and are therefore not income at all. This distinction is actually embedded in the tax laws of some countries—most notably in the tax law of Britain, which in principle did not tax capital gains until 1964. Another argument—this one purely pragmatic—has it that the capital-gains provision is necessary to encourage people to take risks with their capital. (Similarly, the advocates of stock options say that corporations need them to attract and hold executive talent.) Finally, nearly all tax authorities are agreed that taxing capital gains on exactly the same basis as other income, which is what most reformers say ought to be done, would involve formidable technical difficulties.