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Notes on the Effect of Capital Gains Taxation on Non-Austrian Assets


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  • Daniel J. Kovenock
  • Michael Rothschild


This paper is an attempt to assess the effect of capital gains taxation on non-Austrian assets, such as claims to profits of continuing enterprises. As compared to taxation on an accrual basis, the capital gains tax discourages sales of appreciated assets. This is the "lock-in" effect. Because assets subject to capital gains taxation are generally held a long time, conventional estimates suggest that the effective rate of capital gains taxation is low. We contend that conventional estimates could seriously underestimate the effective rate of capital gains taxation because they ignore uncertainty. We construct a model which allows us to calculate the value of being able to actively manage a portfolio and use this model to calculate the effective rate of capital gains taxation. For several plausible parameter values the effective rate is significantly higher than estimates under certainty. We also discuss some of the ways in which the lock-in effect may distort the allocation of investment funds and the efficient workings of the capital market.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1568.

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Date of creation: Feb 1985
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Publication status: published as Kovenock, Daniel J. and Michael Rothschild. "Notes on the Effect of Capital Gain Taxation on Non-Austrian Assets," Economic Policy in Theory and Practice, ed. by Assaf Razin and Efraim Sadka. Hong Kong: Macmillan Press Ltd. , 1987, pp. 309-339.
Handle: RePEc:nbr:nberwo:1568

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  1. Choi, E. Kwan & Menezes, Carmen F., 1985. "On the Magnitude of Relative Risk Aversion," Staff General Research Papers 10604, Iowa State University, Department of Economics.
  2. John L. Evans & Stephen H. Archer, 1968. "Diversification And The Reduction Of Dispersion: An Empirical Analysis," Journal of Finance, American Finance Association, American Finance Association, vol. 23(5), pages 761-767, December.
  3. George M. Constantinides, 1979. "Multiperiod Consumption and Investment Behavior with Convex Transactions Costs," Management Science, INFORMS, INFORMS, vol. 25(11), pages 1127-1137, November.
  4. Goldman, M Barry, 1979. "Anti-Diversification or Optimal Programmes for Infrequently Revised Portfolios," Journal of Finance, American Finance Association, American Finance Association, vol. 34(2), pages 505-16, May.
  5. Joseph E. Stiglitz, 1983. "Some Aspects of the Taxation of Capital Gains," NBER Working Papers 1094, National Bureau of Economic Research, Inc.
  6. 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.
  7. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, Elsevier, vol. 3(4), pages 373-413, December.
  8. Protopapadakis, Aris, 1983. "Some Indirect Evidence on Effective Capital Gains Tax Rates," The Journal of Business, University of Chicago Press, vol. 56(2), pages 127-38, April.
  9. Joel Slemrod, 1978. "The Lock-In Effect of the Capital Gains Tax: Some Time Series Evidence," NBER Working Papers 0257, National Bureau of Economic Research, Inc.
  10. 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.
  11. Feldstein, Martin & Yitzhaki, Shlomo, 1978. "The effects of the capital gains tax on the selling and switching of common stock," Journal of Public Economics, Elsevier, Elsevier, vol. 9(1), pages 17-36, February.
  12. Constantinides, George M., 1984. "Optimal stock trading with personal taxes : Implications for prices and the abnormal January returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(1), pages 65-89, March.
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Cited by:
  1. Auerbach, Alan J, 1992. "On the Design and Reform of Capital-Gains Taxation," American Economic Review, American Economic Association, American Economic Association, vol. 82(2), pages 263-67, May.
  2. Klein, Peter, 2001. "The capital gain lock-in effect and long-horizon return reversal," Journal of Financial Economics, Elsevier, Elsevier, vol. 59(1), pages 33-62, January.
  3. Klein, Peter, 1999. "The capital gain lock-in effect and equilibrium returns," Journal of Public Economics, Elsevier, Elsevier, vol. 71(3), pages 355-378, March.


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