While I agree with much of your post, current taxes on income (featuring reduced taxes on capital income, exclusion of most income from gifts/inheritances, and supplemental taxes on labor income [“payroll tax”]) absolutely disincentivize working for income if you have choices of how to get income. Now, lots of people don't have choices and are stuck with work, but that doesn't mean there is no disincentive effect.
(Of course, “treat income as income” makes this much fairer than the status quo, much less the laughably misnamed “FairTax”.)
All of those alternative sources of money require an individual to already be quite wealthy: capital income means capital assets; gifts/inheritances means wealthy family. At that point...it honestly doesn't matter how you get your money. Over my career I have provided tax consulting and compliance services to many HNW individuals, and income taxes were never once a disincentive to working. A person rich enough to choose how they earn their income works because they choose to.
(Note: payroll taxes such as FICA, etc., actually phase out pretty quickly after $100k in earnings, so they're regressive in nature. There is the high-wage supplemental tax, but this is offset by the cap on income subject to SSI tax, so workers earnings more than $140k actually pay less in payroll tax.)
That being said, I agree that capital gains should be treated as regular income (as it was historically, pre-Reagan) and that income received via gift/inheritance should not receive a FMV cost basis.
That is probably different than the incorrect argument I've often heard, that "if I get paid more and move into a new tax bracket, I'll net less money" which shows up when someone doesn't understand the concept of taxation on marginal dollars.
I think the people who argue for higher taxes on wealthier brackets also argue for capital gains to be taxed at a similar/equal rate to income.
Right, exactly. And besides the examples you mentioned, the differing income tax brackets on married couples is also a big example of this. If only one spouse is working, and the second spouse is deciding whether to get a job, then having all of the second spouse's income taxed at a higher marginal rate from the get go can easily influence people's decisions.
Note: for married couples, the tax bracket thresholds are doubled, except for the highest (37%) bracket, which kicks in for couples making more than roughly $625k but for singles at roughly $520k.
The actual effect is that you need to actually have a huge wealth disparity between partners' earnings for the so-called marriage penalty to kick-in. Fox News notwithstanding, the overwhelming majority of married couples will not see a marriage penalty.
All true, and good points. However the marriage bonus for single earners is much greater than the bonus for double earners, so if you look at it from a certain angle there is sort of a penalty for dual earners vs sole breadwinner marriages.
While I agree with much of your post, current taxes on income (featuring reduced taxes on capital income, exclusion of most income from gifts/inheritances, and supplemental taxes on labor income [“payroll tax”]) absolutely disincentivize working for income if you have choices of how to get income. Now, lots of people don't have choices and are stuck with work, but that doesn't mean there is no disincentive effect.
(Of course, “treat income as income” makes this much fairer than the status quo, much less the laughably misnamed “FairTax”.)