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Inflation and the Excess Taxation of Capital Gains on Corporate Stock

In: Inflation, Tax Rules, and Capital Formation

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  • Martin Feldstein
  • Joel Slemrod

Abstract

The present study shows that in 1973 individuals paid nearly $500 million of extra tax on corporate stock capital gains because of the distorting effect of inflation. A detailed analysis shows that the distortion was greatest for middle income sellers of corporate stock. In 1973, individuals paid capital gains tax on more than $4.5 billion of nominal capital gains on corporate stock. If the costs of these shares are adjusted for the increases in the consumer price level since they were purchased, the $4.5 billion nominal gain becomes a real capital loss of nearly $1 billion. As a result of this incorrect measurement of capital gains, individuals with similar real capital gains were subject to very different total tax liabilities. These findings are based on a new body of official tax return data on individual sales of corporate stock.

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This chapter was published in:

  • Martin Feldstein, 1983. "Inflation, Tax Rules, and Capital Formation," NBER Books, National Bureau of Economic Research, Inc, number feld83-1, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11332.

    Handle: RePEc:nbr:nberch:11332

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    1. Feldstein, Martin S & Green, Jerry R & Sheshinski, Eytan, 1978. "Inflation and Taxes in a Growing Economy with Debt and Equity Finance," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S53-70, April.
    2. Peter A.Diamond, 1973. "Inflation and the Comprehensive Tax Base," Working papers 98, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Martin Feldstein, 1978. "The Welfare Cost of Capital Income Taxation," NBER Chapters, in: Research in Taxation, pages 29-51 National Bureau of Economic Research, Inc.
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    Cited by:
    1. Judd, Kenneth L, 1985. "Short-run Analysis of Fiscal Policy in a Simple Perfect Foresight Model," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 298-319, April.
    2. 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.
    3. Kenneth L. Judd, 1983. "Exercises in Voodoo Economics," Discussion Papers 558, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Ignacio Palacios-Huerta, 2001. "An Empirical Analysis of the Risk Properties of Human Capital Returns," Working Papers 2001-10, Brown University, Department of Economics.
    5. Martin Feldstein & Joel Slemrod & Shlomo Yitzhaki, 1981. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains," NBER Working Papers 0250, National Bureau of Economic Research, Inc.
    6. Zoran Ivković & James Poterba & Scott Weisbenner, 2005. "Tax-Motivated Trading by Individual Investors," American Economic Review, American Economic Association, vol. 95(5), pages 1605-1630, December.
    7. Daniel J. Kovenock & Michael Rothschild, 1983. "Capital Gains Taxation in an Economy with an "Austrian Sector"," NBER Working Papers 0758, National Bureau of Economic Research, Inc.

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