A couple weeks ago, I wrote a column on the tax hike after the fiscal cliff. One of the important changes to the tax code this year is a big jump on the capital gains tax. I write this to explain why the capital gains tax is the most unfair and destructive of all kinds of taxes.

Mitt Romney was embarrassed when the public discovered he had paid taxes on only about 13 percent of his income in recent years. Some people were shocked to know although Romney is an extremely wealthy man, he had paid less than most middle-class Americans do. But very few recognize the largest part of his taxable income was from the capital gain returns of investing money over time in non-physical capital, such as stock, saving, bonds, private equity and property.

Even many people who realized Romney had a huge amount of capital gains still thought a low tax rate on capital gains is, to a large extent, a contributor to income inequality. But the truth is that capital gains tax is a punishment to smart people who work hard, a destructive force to the economy and discourages risk taking.

To do a favor to the people who think low capital gains tax is unfair, let me throw fairness into the equation. Yes, capital gains tax is unfair. But it is unfair in the sense of taxing income twice rather than taxing the wealthy too little.

A simple example will illustrate how the capital gains tax works. Suppose Jones and James have the same income, $100 a week. The income tax rate is 20 percent for both of them, so Jones and James each pay $20. Jones spends the remaining $80 on his favorite food, salmon, but James has a different idea how to spend his money: He spends $40 on his favorite food, shrimp, and puts the remaining $40 in an investment portfolio that yields $20 after four weeks, which he can spend on more shrimp. The government sees James’ extra income and feels it’s unfair to let him own more than Jones, with their same initial wealth, so it decides to take 50 percent away of what James earned from his investment. This means James’ income is taxed twice. Before the capital gains tax is introduced, the income tax rate already treats everyone as equal. People have the freedom to choose how to spend their money, whether it is spending all of it right away or saving it for future consumption.

However, the capital gains tax changes people’s incentive on how to spend their money and generates deteriorating outcomes. The nature of the capital gains tax works in the same as that of sales tax. If the government taxes shrimp and salmon at different rates, with a higher rate on shrimp than salmon, the tax may force James to buy salmon as a substitute for his favorite food. This is coercive because it forces people to buy things they don’t really want. Like sales tax, the capital gains tax deprives people of their freedom to choose how they would like to spend their money.

The purpose of a well-designed tax code is to encourage the hardworking and discourage the lazy. What’s so terrible about the capital gains tax? There are two economic decisions going on: work versus sloth and saving versus spending. True, you want to encourage work and saving, while discouraging sloth and spending. Just as true: You must tax something. So it makes sense, at least to me, to tax all of these activities equally at the lowest responsible rate. The capital gains tax is violating this principle in every possible way.