Inflation isn't deductible, which means that bonds can pay extremely high (real) capital gains rates. If the bond pays 2.5% nominal per year, and inflation is 2

Inflation isn't deductible, which means that bonds can pay extremely high (real) capital gains rates. If the bond pays 2.5% nominal per year, and inflation is 2% per year, and you pay a 20% capital gains rate, then you make 0.5% in real returns and owe 0.5% in capital gains taxes. Which is a 100% effective tax rate. Stocks are more forgiving, at 2% inflation, plus 8% nominal returns (6% real), and a 20% tax, you would pay 26.7% effective taxes. At 6% inflation, it would be a 40% tax rate. So this all made more sense when taxes were reformed under Reagan, which had a high inflation environment as a backdrop. Realistically, it would probably make more sense to have inflation deductible and progressive, but equal rates for cap gains and labor income. (edit: for full equivalency, you might also need a rebate for capital losses).