<P> Richard Epstein says that the capital - gains tax "slows down the shift in wealth from less to more productive uses" by imposing a cost on the decision to shift assets . He favors repeal or a rollover provision to defer the tax on gains that are reinvested . </P> <P> The fact that the long - term capital gains rate is lower than the rate on ordinary income is regarded by the political left, such as Sen. Bernie Sanders, as a "tax break" that excuses investors from paying their "fair share ." The tax benefit for a long - term capital gain is sometimes referred to as a "tax expenditure" that government could elect to stop spending . By contrast, Republicans favor lowering the capital gain tax rate as an inducement to saving and investment . Also, the lower rate partly compensates for the fact that some capital gains are illusory and reflect nothing but inflation between the time the asset is bought and the time it is sold . Moore writes, "when inflation is high...the tax rate can even rise above 100 percent", as when a taxpayer owes tax on a capital gain that does not result in any increase in real wealth . </P> <P> The one - year threshold between short - term and long - term capital gains is arbitrary and has changed over time . Short - term gains are disparaged as speculation and are perceived as self - interested, myopic, and destabilizing, while long - term gains are characterized as investment, which supposedly reflects a more stable commitment that is in the nation's interest . Others call this a false dichotomy . The holding period to qualify for favorable tax treatment has varied from six months to ten years (see History above). There was special treatment of assets held for five years during the Presidency of George W. Bush . In her 2016 Presidential campaign, Hillary Clinton advocated holding periods of up to six years with a sliding scale of tax rates . </P> <P> Carried interest is the share of any profits that the general partners of private equity funds receive as compensation, despite not contributing any initial funds . The manager may also receive compensation that is a percentage of the assets under management . Tax law provides that when such managers take, as a fee, a portion of the gain realized in connection with the investments they manage, the manager's gain is afforded the same tax treatment as the client's gain . Thus, where the client realizes long - term capital gains, the manager's gain is a long - term capital gain--generally resulting in a lower tax rate for the manager than would be the case if the manager's income were not treated as a long - term capital gain . Under this treatment, the tax on a long - term gain does not depend on how investors and managers divide the gain . </P>

Why are short term capital gains taxed as ordinary income
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