In 1913, the 16th Amendment to the Constitution was passed giving power to the government to tax capital gains income. According to some, the law was never intended to tax labor (wages or salaries), which at the time were considered an equal exchange of goods/services akin to bartering and were not considered “profit” income. The popularity of the 16th Amendment was in part due to the fact that it targeted only the very wealthy and in part due to the support for Prohibition at the time. Since the many voters supported Prohibition, the Federal Government would soon lose income from a consumption tax on alcohol and a new kind of tax was needed: tax on capital gains.
At the same time in 1913, the Federal Reserve was created, granting the power to create U.S. currency to private banks and allowing those banks to sell treasury bonds, make loans and charge individuals and the government interest on loans and bonds. The income tax would help the U.S. government pay its interest to the Federal Reserve.
A tax on capital gains (and not necessarily other forms of income) was seen as a way to lessen the inevitable tendency for money to accumulate among a smaller and smaller percentage of the people. It is a tax on making money with money.
The economic philosophy of Georgism recommends abolishing all kinds of taxes, including capital gains tax, and replacing them with a single tax on the ownership of certain kinds of property, for example, land and finite natural resources.
Go to “income tax on wages” questionnaire.