Doug T, thank you for your comment. You are quite right in mentioning several "major economists who support preferential tax treatment for capital gains," which was implicit in my mentioning "all types of income" with an emphasis on the phrase "properly measured." A short book review didn't leave room to elaborate on that point, so I can elaborate a bit more here. The view of capital gains taxes that you rightly mentioned is in the context of the practicalities of political science rather than a necessity in economic analysis. Among other measurement issues, properly measured capital gains would account for inflation (a point to which you alluded) and thus obviate the need to treat real, or inflation-adjusted, capital income any differently from other forms of income. Indeed, some draft tax reform proposals in the early 1980s from the Reagan Administration attempted to put capital gains on an even playing field in exactly this way. I imagine that careful analysts such as Hubbard and Mankiw - and I would importantly add Martin Feldstein to this list - might have supported such reforms back then. Unfortunately, the formulation of inflation adjustment also might've been too complicated to sell politically or for Congress to appreciate.

The argument that capital gains should receive special treatment also rests on the idea that doing so in the face of faulty income measurement would induce a better level of investment and hence support economic growth. Perhaps it would if we could get the second-best adjustments right. Starting from neutral, the economy would generate more of any activity that is taxed less than before or less than other activities. Mine was a more theoretical point: why favor investment in physical and intangible capital -- if one could measure the income it generates properly? Human capital is also important for economic growth and, while such investment now receives a lot of subsidies (free public education, subsidized colleges, etc.), there is much human capital investment that is disfavored relative to physical investment. On-the-job training and spending one's leisure time to learn new skills are two examples. Moreover, it is quite plausible, if unusual in the history of the U.S. economy, that one could have too much investment in physical capital, witness the technology and real estate bubbles of recent decades. While hardly an example of a market economy, the overinvestment in the last decade or so in China also has run into the economic laws of growth - too much of a good thing to be sustainable or efficient. My point isn't to favor one or another form of capital, or to favor them in different ways, but to favor neither relative to other types of income generation. If we could have an efficient tax system, I'd prefer to let the economy decide on the proper mix of human and physical capital, land, research and innovation, and materials and labor needed to produce our gross domestic product efficiently without artificially supporting any one class of inputs.

Finally, and this point is a matter of nomenclature, so I quibble, I wouldn't characterize favoring the tax treatment of capital gains as a "school of economic thought," no less a major one. Rather, it is a specialty within the field of public finance, one that has thankfully attracted the efforts of some very accomplished economists.