If the average worker has any stock or index fund investments, that worker absolutely can take advantage of this (in the U.S.). It's called tax-loss harvesting - worth reading about here [1].
That is laughably small.
And you can't deduct the losses from your other income while you can as a business.
Example, in year 1 you have a $15,000 net capital loss. You write off the maximum $3,000 of this against your other income, carrying over a $12,000 capital loss. In year 2 you have a $10,000 net capital gain, this is offset against your carried over loss leaving $2,000 to write off against your income.
Of course, there's a political component of it too - taxes are always political, and are used to promote or suppress certain actions. I guess the government does want to promote long-term investment and thus defines lower tax rates for this activity.
Also there is plenty of business income that is not double taxed because it isn't run through a C Corp.
Then in regards to incentives. We already have interest rates to adjust the knobs of investment versus consumption. Capital gains is just a way to make the tax system less progressive.
However, once you earned enough money, beyond subsistence level, you have a choice - you can spend it all on consumption, or you can defer some of the consumption, or give up a part of it, as an investment, in hope that this would increase your consumption abilities in the future, or you ability to retire, etc. Modern economy would not work without investment - you need massive upfront spending to lift off something like Netflix of the ground, before it starts being profitable.
This investment is, ultimately, financed by people who chose investment over consumption (might be one very rich person, or tens of thousands of not so rich people giving their money to the bank, which in turn loans it to the entrepreneurs, or likely a mix of both). Ensuring this choice remains a viable and attractive one is something that the government would definitely have an incentive to support.
Moving onto more statistical approach, this one: https://www.fa-mag.com/news/most-millionaires-self-made--stu... says only 8% of millionaires inherited their wealth. For billionaires, according to this: https://www.entrepreneur.com/article/269593 18% got a jump-start (maybe parents were mere millionaires, but the child became a billionaire), and 62% are self-made. So inheritance effects exist, but maybe they are not that huge? At least, clearly, not a majority.
Of course, not everybody starts in the same place. But human behavior and motivations are similar, and thus you can reason about them despite the differences.
Also, realize that the government does promote both labor and investments, just through different means. Lowering taxes isn't going to affect how a fully employed individual produces labor; they are trading their time for money. Lowering taxes on investment will promote more investments, since the money for those investments have already been taxed, and since the trade of investments is money-now for money-later, taxes have a much more significant influence over the extent to which someone will invest in a business. Someone fully invested in other things (non-stock commodities, etc) might move some of their investments into businesses instead.
Let's say you wanted to give income from labor the same benefits as (negative) income from investments that lost money... How would you do that?
Say I earn a healthy $250K/year at my W-2 job. If I buy a large house with the proceeds from my job, have I incurred a loss? How about if I eat out at an expensive restaurant every night, spending my entire paycheck. Do I get to avoid taxes by keeping my lifestyle expensive?
That being said a corporatiom is not a person, and cannot eat a fancy dinner, so much of their profit can only become reinvested back into paying people who ultimately get taxed for eating fancy dinners.
I am not all that sure about carrying forward investment losses, and as you are aware some expenses are deductible while some are not. While eating a fancy restaurant is strictly optional, spending on medical of educational costs are quite different.
In general I think if someone investigates the edge cases first (eg looking at the second-order effect like carrying deductions on negative income) that's a sign of not wanting to look at the larger picture.
As you indicated above, so much of our personal expenses are "discretionary" in the sense that we could increase or lower them by choice. That's exactly the difference between business investment spending (required to produce the revenue that's taxed) vs. personal income/spending, which is based strongly on preferences. Hard to justify taxing frugal individuals more than lavish spenders just because they save a larger percentage of their income...
It's available through archive.org https://archive.org/stream/galaxymagazine-1954-04/Galaxy_195...
The lenient rates were introduced during high-inflation years. If somebody was pursuing a long-term project spanning over several years (let's say, building a new apartment complex), high punitive tax rates at liquidity time (let's say, 5 years down the road) combined with decreased buying would obliterate any real profitability.
The 12-month cut-off window, though, seems completely arbitrary.
The argument is kinda moot anyways, as capital gains are completely voluntary - one sells when they want to sell. If they don't want to sell, but need liquidity, they can access a bunch of asset-backed loans (HELOCs, PALs, cashout refinance, etc.) Ken Fisher in his book "Debunkery" (and I'm sure the data exists elsewhere) shows how total revenue figures collected by US government do not change over decades, regardless of the actual capital gains rates.
I am not sure what the counter-argument to that is, but one thing I can think of is increased complexity of a tax return for an average joe investor, who bought and sold a few funds in his portfolio. Opponents will also likely point that an official measure - CPI - can be manipulated for political purposes.
Love it when people shoot down proposals I never made
we don't