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The Efficiency Loss of Capital Income Taxation under Imperfect Loss Offset Provisions

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  • Syed M. Ahsan

    (Concordia University, Montreal, Quebec, Canada)

  • Panagiotis Tsigaris

    (Thompson Rivers University, Kamloops, British Columbia, Canada, ptsigaris@tru.ca)

Abstract

The importance of capital loss offset provisions in a world of risk is well documented in the tax literature. However, the potential deadweight losses owing to imperfect offset has not been fully explored. This article develops a framework, whereby that investigation can be carried out, and uses numerical simulations to investigate the size of potential losses. The results obtained show that welfare losses owing to the absence of offset provisions could be substantial. Under plausible assumptions about attitudes toward risk and time preference, and with a capital income tax rate of 35 percent, over forty-five cents per dollar of tax revenue raised may be dissipated. In contrast, full loss offset may reduce that loss to approximately twelve cents.

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Bibliographic Info

Article provided by in its journal Public Finance Review.

Volume (Year): 37 (2009)
Issue (Month): 6 (November)
Pages: 710-731

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Handle: RePEc:sae:pubfin:v:37:y:2009:i:6:p:710-731

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Keywords: capital income taxation under uncertainty; deadweight loss; loss offset provisions;

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  1. Farmer, Roger E A, 1990. "Rince Preferences," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 43-60, February.
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  8. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
  9. Syed Ahsan & Peter Tsigaris, 1998. "The design of a consumption tax under capital risk," Journal of Economics, Springer, vol. 68(1), pages 53-78, February.
  10. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-44, September.
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  12. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 1-27, February.
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Cited by:
  1. Hlouskova, Jaroslava & Tsigaris, Panagiotis, 2012. "Capital Income Taxation and Risk Taking under Prospect Theory," Economics Series 283, Institute for Advanced Studies.

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