Taxes and Economics
Alan Blinder gives a pretty good lesson.
just remember one simple principle: If we tax Activity A at 15 percent and Activity B at 38 percent, a free-market economy will give us more A and less B. Some of this shifting will represent genuine movements of resources out of B and into A — including those bad investments I just mentioned. The rest will be paper manipulations devised to avoid taxes.
Politicians frame the issue as taxing certain types of people. Economists look at what activities are being taxed.
Blinder argues that taxing capital gains differently from other forms of income creates distortions. You try to change other forms of income into capital gains.
In my view, the tax system will always be taxing the wrong activity as long as it taxes income. Instead, the tax should be on consumption.
When you earn income, you can either spend it on consumption, save it, or give it to charity. The latter two should not generate taxes.