Yeah? And what about risk? The difference is that income is pretty much guaranteed. Capital gains come from riskier investments. If you’re going to tax them the same, you are biasing the market against investment.
When considering investments under conditions of risk, you have to look at expectation, not the profit if you’re right. An investment that loses $20,000 four times out of five but gains $100,000 if it comes in has an expected return of $20,000 ((4 X -20,000) + (1 X 100,000)). The problem is that if it does come in, the government tax is based on the $100,000. Any tax over 20% of that value turns the expectation negative.
Now, we have various ways to carry losses forward that compensates in part for that, but the point to my other example is when the risk is high even carrying losses forward doesn’t compensate for the fact that the tax does not price risk. And in the case of a small investor investing in only one business (his own or a family members), There will never be a loss to carry forward as there’s only the single investment. But the expectation doesn’t change, so the tax distorts the equation and pushes the investor away from investing in the risky venture.
As for carrying forward losses - when the left talks about rich people who paid no taxes in a given year, they rarely look at why, but loss carry-forward is a big reason - especially after a recession where many capital losses were incurred. You would expect average effective tax rates to go down afterwards as profits are offset by previous losses for tax purposes. As they should be.