1. You sit down at a blank screen and begin writing code.
2. You put your own money into launching your web app, then advertising it, then managing it every day and modifying things before you see a single penny in revenue.
3. You earn revenue, now you are already paying taxes on that revenue.
4. You sell the company which had zero value to begin with, you already paid tax on all the revenue you made. Any tax the government now puts on you is a tax for the initial work which you did. This disincentivizes anyone else from creating something new from scratch.
This is why it shouldn't be treated as regular income. It was done in your free time. Everyone makes regular income, and pays taxes on that, but only a fraction of people work extra hours on passion. Taxing one's passion is essentially to kill anyone's desire to do it.
If no one in your society creates anything from passion, and everyone works for a corporation, your society will not be competitive or dynamic.
Therefore there's a societal, even Socialist interest in encouraging this type of behavior - or at least not punishing it.
Same reason the last couple Kim Jongs have allowed the peasants in North Korea to grow small plots of private vegetables. Even they know that the creative instinct can only be suppressed so far before doing so creates a negative and destructive drag on even the most tightly controlled corporatist system.
But this is true for everything. A farmer puts a seed into the groud, takes care of it, harvests the vegetables, sells them, pays vat, pays possible corporate income tax, and if he wants to transfer the money to his personal account, he has to pay out a paycheck and pay taxes on that.
Where's the difference if you work 8 hours at your regulat job + 4 hours at a second job? Or 4 extra hours of that second job for your own company? Or just 4 hours of overtime at the first company?
The farmer paid tax on selling his vegetables, and property tax, and all the other taxes as you said.
If the farmer improves the land by constructing something on it, using his own money, then that is above and beyond the simple sale of products. It should be taxed as an investment that grew in value (i.e. Capital Gains), not as normal income, because the farmer had to risk his own savings to construct it.
If the construction is a hotel, of course he pays taxes too on the income from that. But he was already taxed for the money he saved which he put into building the hotel, so why should he be taxed twice at the income rate when he sells it?
The point of having a capital gains taxrate lower than an income taxrate is to incentivize people not to bury their savings under the mattress but to use it to create new growth. Whether that's by investing in listed companies or in their own startup.
The central difference between tax on earnings and tax on capital gains is that the money the farmer spends to build something new besides simply harvesting, is money the farmer already had saved after tax, and could have put elsewhere, but he took the risk of putting it here. That is why it's unwise to tax creating new value on existing properties, with your own funds, more than you would tax other investments. It prevents people from improving their own properties (or whatever startup or other project they're working on).
Obviously, if you believe that it's best not to stimulate anyone to create anything new, then you wouldn't subscribe to this idea.
1. You sit down at a blank screen and begin writing code.
2. You put your own money into launching your web app, then advertising it, then managing it every day and modifying things before you see a single penny in revenue.
3. You earn revenue, now you are already paying taxes on that revenue.
4. You sell the company which had zero value to begin with, you already paid tax on all the revenue you made. Any tax the government now puts on you is a tax for the initial work which you did. This disincentivizes anyone else from creating something new from scratch.
This is why it shouldn't be treated as regular income. It was done in your free time. Everyone makes regular income, and pays taxes on that, but only a fraction of people work extra hours on passion. Taxing one's passion is essentially to kill anyone's desire to do it.
If no one in your society creates anything from passion, and everyone works for a corporation, your society will not be competitive or dynamic.
Therefore there's a societal, even Socialist interest in encouraging this type of behavior - or at least not punishing it.
Same reason the last couple Kim Jongs have allowed the peasants in North Korea to grow small plots of private vegetables. Even they know that the creative instinct can only be suppressed so far before doing so creates a negative and destructive drag on even the most tightly controlled corporatist system.