Capital gains tax in the US is lower than income from labor, but it is also worth considering the effects of inflation on the investments. Your 4% return is not

Capital gains tax in the US is lower than income from labor, but it is also worth considering the effects of inflation on the investments. Your 4% return is not really a 4% increase in wealth, you need to also take out the 1.7% your investment lost that year to inflation. In real terms, you wealth only increased 2.3%. If you want to tax wealth gains as ordinary income there should be an acknowledgment of inflation. In practice you end up with roughly the same amount of money going to taxes and a much more complicated system. In this example it would raise the investment income tax revenue by 33%, not the 233% difference in tax rates. But the index fund 4% and the 1.7% inflation were pulled out of orifices and our predictive capabilities are so reflected.