Person A is a football player and makes $1 million in salary per year. This is all taxed progressively, meaning that Uncle Sam takes off 39.6% of most of his income. As a result, he pays close to $400k in taxes.
Person B is an investor. He invests in Applied Materials, and they have a very good year. His stock is now worth $1 million more than it was at the beginning of the year. Some of it, he sells - he's gotta eat, after all. That sold stock is taxed like income. Note that as long as he isn't living like a rockstar, he probably didn't sell enough to put him into the top tax bracket; he's just paying his expenses.
The remainder is taxed at about 20% - capital gains is taxed at a lower rate. Thus, because he can control how much of the stock he sells, Person B ends up paying somewhere around 60% of the tax that Person A pays.
This system screws over people who make most of their income through salary and benefits those who make most of their "income" through investments.
This description isn't quite right, though you're mostly in the right direction.
If you buy a share of stock (or any other asset) you don't pay any taxes until you sell it (or you die) and realize the income. That income is called a Capital Gain and is taxed either at Short Term or Long Term rates. Short Term gains (under 1 year) are (more or less) taxes just like regular income. Long Term gains (over 1 year) are taxed at a lower rate.
There are generally pretty good reasons for the different rates and the US is not at all unusual in this way. Virtually all countries have similar setups. The UK (where OP is from) does this.
It's also worth nothing since the blog author was talking about real estate that rent collected from residential real estate is NOT a capital gain, but is ordinary income.
It's even worse than you describe. For the part he doesn't sell, no taxes are owed on the capital gains. Only when capital gains are realised, are taxes owed. If he holds onto that stock forever he can keep compounding forever, without every being taxed.
Not always true about paying taxes - inherited assets are "bullet-vested" to the time of inheritance, with taxes only on increase in value after death.
> Well you also can't spend paper gains, you have to sell and therefore pay taxes.
Wealthy people don't have to spend their capital. They have enough income through e.g. dividends. E.g. Warren Buffett bought (through Berkshire Hathaway) Coca-Cola in 1989, and has never sold a single share. He has indicated he plans to keep holding on to them forever. Hence, he will never pay taxes on the capital gains.
> And you could, you know, lose money in the stock market.
It's not so much that it benefits people who get income from investments as protects them from inflation. If you hold on to something for ten years and sell it for the same amount in constant dollars, the tax you pay on the increase in actual dollars is really a wealth tax.
Person A is a football player and makes $1 million in salary per year. This is all taxed progressively, meaning that Uncle Sam takes off 39.6% of most of his income. As a result, he pays close to $400k in taxes.
Person B is an investor. He invests in Applied Materials, and they have a very good year. His stock is now worth $1 million more than it was at the beginning of the year. Some of it, he sells - he's gotta eat, after all. That sold stock is taxed like income. Note that as long as he isn't living like a rockstar, he probably didn't sell enough to put him into the top tax bracket; he's just paying his expenses.
The remainder is taxed at about 20% - capital gains is taxed at a lower rate. Thus, because he can control how much of the stock he sells, Person B ends up paying somewhere around 60% of the tax that Person A pays.
This system screws over people who make most of their income through salary and benefits those who make most of their "income" through investments.