Final answer:
Interest income is taxed as ordinary income, not at lower capital gains rates. The U.S. tax system charges taxes on nominal interest without considering inflation, potentially taxing non-existent gains in buying power.
Step-by-step explanation:
It is false that interest income is generally taxed at lower capital gains rates. In the United States, the federal income tax system taxes interest income and capital gains differently. Interest income is taxed as ordinary income, according to an individual's income tax bracket. On the other hand, long-term capital gains are usually taxed at lower rates to encourage investment. The U.S. income tax is charged on nominal interest, not adjusting for inflation. For instance, if someone invests $10,000 and receives a 5% nominal interest rate, they would be taxed on the $500 interest income regardless of the inflation rate. This can be troubling if the real interest rate (after accounting for inflation) is actually lower than the nominal rate, as it may result in paying taxes on what is, in reality, not an increase in buying power. Low capital gains taxes are designed to encourage investment and economic growth.
Interest income is generally not taxed at lower capital gains rates. In the United States, interest income is taxed as ordinary income, which means it is subject to the same tax rates as wages and salaries. Capital gains, on the other hand, are taxed at lower rates, ranging from 0% to 20%, depending on the individual's income level and the type of asset being sold. So, while capital gains may be taxed at lower rates, interest income is typically taxed at ordinary income rates.