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?