Discuss one reason for and one reason against the way the current tax system treats capital gains differently than other types of income.

What will be an ideal response?

Arguments against: (1) Given that only the more affluent in the society generally have capital gains on anything other than houses, eliminating capital gains taxation would make the federal tax system less progressive than it is. (2) Furthermore, a low capital gains tax, or none at all, would encourage speculation in all sorts of assets and might make the stock market and other financial markets more volatile than they already are. Arguments for (1) high capital gains taxes tend to discourage investment, or at least do not reward investors for making good choices; investments involve risk, and having to pay full tax rates if the risk is justified does not seem fair. (2) Moreover, capital gains are generally counted in current dollar terms and do not take into account the effects of inflation, which may make an apparently large return on an investment actually trivial. (3) Finally, an aversion to paying capital gains taxes may encourage some investors to hold onto assets after they have ceased to be as productive as would alternative uses of the same money.