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Optimal Capital-Gains Taxation under Limited Information

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  • Green, Jerry R
  • Sheshinski, Eytan

Abstract

Taxation of capital gains at realization may distort individuals' decisions regarding holding or selling during an asset's lifetime. This creates the problem of designing a tax structure for capital gains so as to induce efficient patterns of holding and selling. Several tax structures are explored in this paper. Linear taxation, at rates which rise with the holding period, can achieve the first best, even under the conditions of limited information that we postulate. The form of the optimal tax is independent of the stochastic structure of rates of return. We also derive the optimal nonlinear tax under the constraint that it be independent of the holding period. Second-best tax rules are examined. Results in a two-period model are contrasted with those in a continuous time framework. Also treated is the case in which the returns to the asset under consideration depend on the aggregate quantity invested.
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Suggested Citation

  • Green, Jerry R & Sheshinski, Eytan, 1978. "Optimal Capital-Gains Taxation under Limited Information," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1143-1158, December.
    • Handle: RePEc:ucp:jpolec:v:86:y:1978:i:6:p:1143-58
    DOI: 10.1086/260732
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    Cited by:

    1. George Fane & Martin Richardson, 2005. "Negative Gearing and the Taxation of Capital Gains in Australia," The Economic Record, The Economic Society of Australia, vol. 81(254), pages 249-261, September.
    2. Martin S. Feldstein & Daniel R. Feenberg, 1983. "Alternative Tax Rules and Personal Saving Incentives: Microeconomic Data and Behavioral Simulations," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 173-210, National Bureau of Economic Research, Inc.
    3. Sébastien Duchêne & Adrien Nguyen-Huu & Dimitri Dubois & Marc Willinger, 2022. "Risk-return trade-offs in the context of environmental impact: a lab-in-the-field experiment with finance professionals," Working Papers hal-03883121, HAL.
    4. George Fane & Martin Richardson, 2004. "Capital gains, negative gearing and effective tax rates on income from rented houses in Australia," Departmental Working Papers 2004-06, The Australian National University, Arndt-Corden Department of Economics.
    5. Francesco Menoncin & Paolo Panteghini, 2009. "Retrospective Capital Gains Taxation in the Real World," CESifo Working Paper Series 2674, CESifo.
    6. Englund, Peter, 1985. "Taxation of capital gains on owner-occupied homes," European Economic Review, Elsevier, vol. 27(3), pages 311-334.
    7. Joseph E. Stiglitz, 1980. "On the Almost Neutrality of Inflation: Notes on Taxation and the Welfare Costs of Inflation," NBER Working Papers 0499, National Bureau of Economic Research, Inc.
    8. Matt Benge & George Fane, 2006. "Adjustment costs and the neutrality of income taxes," Departmental Working Papers 2006-04, The Australian National University, Arndt-Corden Department of Economics.
    9. Auerbach, Alan J, 1991. "Retrospective Capital Gains Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 167-178, March.

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