There appears to me to be another reason for treating capital gains differently. Using Dr. Sowell's example, if I had put my $25K in McDonnalds, I would now be worth a billion. With that kind of money, I would probably diversify, selling some and moving it to many other investments, including the small and upcoming. That is good for the business of the country. But if to sell I have to give 50% to the feds and state, I would be much less likey to sell - thus the economy has a tendence to stagnate and atriphy - not good.