It is Time to End Favored Tax Treatment of Capital Gains
My new column is up at Forbes.com, and asks why we fetishize capital gains over regular income
Let's consider two investors. Investor A buys a piece of land and builds a campground on it, intending to run the campground for decades. Investor A gets her return on investment from the profits each year running the campground, profits that are taxed as regular income (Full disclosure: In my business life, I am essentially investor A).
On the other hand, Investor B buys the same piece of land and builds the same campground on it, but in about a year Investor B sells the newly developed facility, making a profit on the sale over his original investment. Investor B likely will pay taxes on this gain at reduced capital gains tax rates.
But why? When Investor B sold the property, the price he got was probably something like the present value of the expected cash flows from operating the campground. Both Investor A and B created essentially the same value., but Investor B took the value as a single lump sum rather than as a stream of income over time. Why is Investor B's approach preferred in the tax code? Or, stated another way, why does the tax code favor asset flipping over long-term operations?
