You are comparing money at two different times, which is invalid. Assume an income tax rate of X%, cap gains tax rate of Y%, and a rate of return R. Consider

You are comparing money at two different times, which is invalid. Assume an income tax rate of X%, cap gains tax rate of Y%, and a rate of return R. Consider a spender. In year 0 he earns 1 dollar, he pays X% in cap gains and spends the rest. In total he paid X year 0 dollars. Consider a saver. In year 0 he earns 1 dollar, he pays X% in cap gains and invests the rest. 1 year later he is holding (1-X)(1+R), which he cashes out of. He then pays Y[(1-X)(1+R)-(1-X)] in taxes. In total, he has paid X+Y[(1-X)(1+R)-(1-X)]/(1+R) in year 0 dollars in taxes. The latter is always greater than the former. Lets expand your example. Suppose the rate of return is 100%. The spender received $10,000 at time 1 and paid $5,000 in year 1 dollars. 50% tax rate. In contrast, the saver received $20,000 at time 0 and paid $10,000 in taxes. Then they invested the remainder, and at time 1 received an additional $10,000. He then paid $2,500 on that. In year 1 dollars, he paid $20,000 ($10,000 year 0 dollars == $20,000 year 1 dollars) in income taxes + $2,500 in cap gains. That's a total tax rate of 56.25%.