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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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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 86 (1978)
Issue (Month): 6 (December)
Pages: 1143-58

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Handle: RePEc:ucp:jpolec:v:86:y:1978:i:6:p:1143-58

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Web page: http://www.journals.uchicago.edu/JPE/

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Cited by:
  1. Alan J. Auerbach, 1988. "Retrospective Capital Gains Taxation," NBER Working Papers 2792, National Bureau of Economic Research, Inc.
  2. Englund, Peter, 1985. "Taxation of capital gains on owner-occupied homes," European Economic Review, Elsevier, vol. 27(3), pages 311-334.
  3. 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.
  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 Group Munich.
  6. 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.

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