Rich Americans should welcome higher capital-gains taxes

This year, several of America’s most celebrated private companies are expected to go public at combined valuations worth trillions of dollars. SpaceX’s initial public offering later this week could raise as much as $80 billion, making it the biggest in history.

The founders, early employees and investors who hold stakes in these businesses are about to experience the largest concentrated wealth-creation events in a generation. Almost none of it will arrive as a paycheck.

The American social contract is fraying, not because capitalism has failed, but because the distribution of its rewards has become disconnected from labor and increasingly concentrated in the ownership of assets. A central element in this shift is the preferential tax treatment given to capital gains compared to wages.

The US has evolved from an industrial-wage economy into something closer to an asset-appreciation economy. In 2025, Americans collectively earned roughly $13 trillion in wages and salaries. Yet during strong market years, gains in household net worth - driven primarily by equity appreciation - have rivaled or exceeded that figure.

This dichotomy would be irrelevant if ownership were as distributed in society as labor, but of course it is not. The top 10% of households own more than 90% of public equities, while private market ownership is concentrated ever more narrowly among founders, elite institutions, sovereign wealth funds and a relatively small network of accredited investors.

The US remains the world’s most innovative and entrepreneurial economy precisely because it rewards ambition, invention, investment and risk-taking. The challenge is preserving that dynamism while adapting governing assumptions to 21st-century realities. A healthy capitalist society cannot indefinitely sustain a system in which the dominant mechanism of wealth accumulation is taxed more favorably than work itself.

The central premise underlying this preferential tax treatment is that society must subsidize capital formation because investment funds are scarce. That argument made sense in an earlier industrial era. It is less persuasive now.

Today, corporate cash reserves are at historic highs, private equity sits on record levels of dry powder, and S&P 500 companies have returned more than $10 trillion to shareholders through buybacks over the past decade - not because they lacked money, but because they lacked good investment opportunities at scale. The modern economic challenge is not a shortage of investment capital; it is a shortage of broad participation in ownership.

Yet the tax code continues to privilege capital gains relative to labor income. Paychecks are taxed immediately and transparently. Capital appreciation benefits from not just preferential rates - topping out at 20% federally - but also from deferral, borrowing against unrealized gains, stepped-up basis at death and sophisticated tax engineering.

The tax code should reflect today’s political and social realities by taxing capital gains at rates closer or equal to those applied to ordinary income, and using the resulting revenue to reduce taxes on labor.

Critics contend that higher capital-gains taxes would cause investors to defer realizations, shrinking the tax base and offsetting much of the projected gain in revenue. That is a serious argument - altering the tax code changes how people invest. Yet there are strong reasons to believe the effect on investor behavior would be weaker today than it would have been in the past.

A growing share of profit realizations occurs when deferral is constrained or impossible: private equity distributions, mergers and acquisitions, and founder liquidity events all force realization on the transaction’s timeline rather than the investor’s preference.

Much of the lock-in effect on capital persists because of the allowance to step up basis at death, meaning heirs only pay taxes on appreciation going forward. Pairing rate increases on realized gains with reform of stepped-up basis would sharply reduce the incentive to defer taxes indefinitely - as would addressing the widespread practice of borrowing against unrealized gains instead of realizing them.

Even after accounting for changes in investor behavior, the revenue available from rate equalization is substantial. Over the past two decades, the federal government has collected roughly $25 trillion in personal income taxes. Federal legislation shifting even part of that burden onto capital appreciation could finance a meaningful reduction in the tax rates paid by working Americans. Preferential treatment could still be preserved for early‑stage venture and angel investment through targeted carve‑outs.

Skeptics will note, correctly, that Congress has a poor record of honoring earmarked revenue promises. To counter that, rate reductions on labor income should be built into the same law that reforms capital gains, scored as a single fiscal package. This would make the tradeoff visible, simultaneous and politically accountable rather than deferred to a future Congress that may never deliver.

Critics also argue that higher capital-gains taxes would suppress investment and slow economic growth. That argument usually assumes the additional revenue disappears into deficit reduction or expanded government spending. Returning that revenue directly to workers as income-tax relief changes the calculus entirely.

Wage earners are far more likely to spend a windfall than are capital-gains recipients. The investor paying more on appreciation reduces savings at the margin, while the worker receiving a tax cut uses it on housing, education and consumption. The net effect is likely to be stimulative on the economy rather than contractionary.

There is also a broader political reality affluent Americans should recognize: If market capitalism does not develop mechanisms to moderate extreme concentration of wealth in a restrained and voluntary way, democratic societies will eventually attempt to do so far more aggressively. The most likely alternatives - wealth taxes and anticorporate populism - would prove far more damaging to long-term economic dynamism than a measured rebalancing of taxes.

Yes, reforming capital-gains rates would be a meaningful tax increase for the wealthy. The choice facing affluent Americans, however, is not between change and no change. It is between helping shape gradual adjustments that preserve the legitimacy and dynamism of a growing capitalist economy, or eventually facing more punitive changes imposed under political duress by voters who feel the system no longer rewards work fairly. The objective is not to diminish capitalism but to preserve it.

A gradual rebalancing, accompanied by reforms limiting indefinite deferral, would not eliminate inequality or suddenly make government efficient - but it need not diminish the dynamism that makes American capitalism exceptional either. What it would do is demonstrate something more important: that the system still has the capacity to correct itself before correction is imposed on it. Whether it does may depend on whether this historic surge of wealth creation proves large enough, and visible enough, to finally prompt that reckoning.

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Nicolas S. Rohatyn is the founder of The Rohatyn Group and a trustee of the Citizens Budget Commission.