Letting you keep your own money is not a subsidy. That being said, labor and capital should be taxed at the same rate, there being no reason to distinguish them for tax purposes.
EDIT: I recognize this is a second reply to the same comment, it focusses on a different and important aspect and isn't really related to my other reply.
> That being said, labor and capital should be taxed at the same rate, there being no reason to distinguish them for tax purposes.
At least in the US system, there are two main distinctions made (there are some others, too, but these are the biggies) between labor and capital income, and both have some logic though better options, I think, exist.
(1) Between labor income and all other income (including, but not limited to, capital) -- labor income alone is treated as qualifying for certain social safety net program eligibility and benefits calculations (Social Security and Medicare), and is therefore subject supplemental taxes to fund those benefits. Alternative: make all income qualifying for those programs, and tax all income to fund them.
(2) Between long-term capital gains and most other income (including both short-term capital gains, labor, and other taxable income sources). Because the former are earned over a period of greater than one year, in a system with progressive marginal taxation on annual income, taxing them the same as the latter with no mechanism for accounting for the period over which they were earned -- especially when they are returns earned by sale of holding that aren't regularly repeatable, rather than sales of small subsets of a large pool of assets structured so that long-term gains can be extracted every year -- results in overtaxation when compared to regularly repeatable income streams like labor income. Alternative: tax all income equally, but allow taxpayers unlimited freedom to recognize (and pay taxes on) income in advance of realization, and limited -- but some -- freedom to defer recognition and taxation of some portion of windfall income for a period of years after realization. (This stops long-term capital gains from being a dodge to get low taxes on repeatable income from large holdings, while not unfairly taxing non-repeatable long-term gains, and also more fairly treating irregular labor income.)
Labor has linear returns. Capital has compounding returns. They're different. We should tax consumption instead, but the current tax distinction isn't madness.
I can see lots of reasons to distinguish between labour and capital. A big part of me thinks it would be appropriate to reward productive labour by reducing taxes and to discourage rent seeking by increasing taxes on investment income. There are practical reasons, of course, not to do this as we would rapidly chase investment from our country, but it is definitely worth thinking about these things.
I think capital gains should be taxed at a lower rate because of inflation. Let's say I buy something (anything, really) and hold onto it for ten years. In that time the CPI goes up 20%. If I sell that thing I bought for 20% more than I paid I really haven't gained anything - the spending power I have after ten years is the spending power I had in the beginning.
