Here are four reasons from Emmanuel Saez:
- Capital income is about 25% of national income (labor income is 75%) but distribution of capital income is much more unequal than labor income. Capital income inequality is due to differences in savings behavior but also inheritances received ⇒ Equity suggests it should be taxed more than labor
- Capital Accumulation is correlated strongly with growth (although causal link is not obvious) and capital accumulation might be sensitive to the net-of-tax return. ⇒ Efficiency cost of capital taxation might be high.
- Capital is more mobile internationally than labor. Incidence is then partly shifted to labor if capital is mobile.
- Capital taxation is extremely complex and provides many tax avoidance opportunities
In short, the equity-efficiency tradeoffs are especially stark. I’ll add two other reasons:
5. We also understand it less well than labor income taxation, so the topic deserves more focus and research.
6. The future path of inequality will likely magnify the topic’s importance.