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How Burdensome are Capital Gains Taxes?

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  • James M. Poterba

Abstract

Several recent and provocative studies have described portfolio trading strategies which permit investors to avoid all taxes on capital gains and to shelter a substantial part of their ordinary income as well. Other studies adopt the more traditional view that the capital gains tax raises the effective tax burden on capital income. This paper uses capital gain realization data from the 1982 IRS Individual Tax Model in an effort to distinguish between these views. It shows that for about one-fifth of the investors who realize gains or losses, the ordinary income loss-offset limitations are binding constraints. Since additional gain realizations do not affect these investors' current tax liability, they may be effectively untaxed on capital gains. Another significant group escapes taxation by not reporting realized gains. However, the largest group of investors trades in a less elaborate and more honest manner, realizing and reporting gains without offsetting losses. The capital gains tax may reduce the after-tax return earned by these investors.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1871.

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Date of creation: Mar 1986
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Publication status: published as Poterba, James M. "How Burdensome are Capital Gains Taxes?" Journal of Public Economics, Vol. 33, No. 2, (1987), pp. 157-172.
Handle: RePEc:nbr:nberwo:1871

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  1. Feldstein, Martin & Slemrod, Joel & Yitzhaki, Shlomo, 1980. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 94(4), pages 777-91, June.
  2. Steven Kaplan, 1981. "The Holding Period Distinction of the Capital Gains Tax," NBER Working Papers 0762, National Bureau of Economic Research, Inc.
  3. Daniel R. Feenberg, 1980. "Does the Investment Interest Limitation Explain the Existence of Dividends?," NBER Working Papers 0530, National Bureau of Economic Research, Inc.
  4. Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, American Finance Association, vol. 40(3), pages 777-90, July.
  5. Constantinides, George M & Scholes, Myron S, 1980. " Optimal Liquidation of Assets in the Presence of Personal Taxes: Implications for Asset Pricing," Journal of Finance, American Finance Association, American Finance Association, vol. 35(2), pages 439-49, May.
  6. George M. Constantinides, 1983. "Optimal Stock Trading with Personal Taxes: Implications for Prices and the Abnormal January Returns," NBER Working Papers 1176, National Bureau of Economic Research, Inc.
  7. King, Mervyn A. & Fullerton, Don, 2010. "The Taxation of Income from Capital," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226436319, 01-2013.
  8. Constantinides, George M, 1983. "Capital Market Equilibrium with Personal Tax," Econometrica, Econometric Society, Econometric Society, vol. 51(3), pages 611-36, May.
  9. Peterson, Pamela P. & Peterson, David R. & Ang, James S., 1985. "Direct evidence on the marginal rate of taxation on dividend income," Journal of Financial Economics, Elsevier, Elsevier, vol. 14(2), pages 267-282, June.
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Cited by:
  1. James M. Poterba, 1987. "Tax Evasion and Capital Gains Taxation," NBER Working Papers 2119, National Bureau of Economic Research, Inc.
  2. Richard J. Rendleman, Jr. & Douglas A. Shackelford, 2003. "Diversification and the Taxation of Capital Gains and Losses," NBER Working Papers 9674, National Bureau of Economic Research, Inc.
  3. Paul J. Bolster & Lawrence B. Lindsey & Andrew W. Mitrusi, 1988. "Tax Induced Trading: The Effect of the 1986 Tax Reform Act on Stock Market Activity," NBER Working Papers 2659, National Bureau of Economic Research, Inc.
  4. James M. Poterba, 1988. "Venture Capital and Capital Gains Taxation," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 508, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Clemens Sialm, 2005. "Tax Changes and Asset Pricing: Time-Series Evidence," NBER Working Papers 11756, National Bureau of Economic Research, Inc.
  6. Shoven, John B. & Sialm, Clemens, 2004. "Asset location in tax-deferred and conventional savings accounts," Journal of Public Economics, Elsevier, Elsevier, vol. 88(1-2), pages 23-38, January.
  7. Zoran Ivković & James Poterba & Scott Weisbenner, 2005. "Tax-Motivated Trading by Individual Investors," American Economic Review, American Economic Association, American Economic Association, vol. 95(5), pages 1605-1630, December.
  8. James M. Poterba, 2001. "Capital Gains Tax Rules, Tax-loss Trading, and Turn-of-the-year Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 56(1), pages 353-368, 02.
  9. Alan J. Auerbach & Leonard E. Burman & Jonathan Siegel, 1998. "Capital Gains Taxation and Tax Avoidance: New Evidence from Panel Data," NBER Working Papers 6399, National Bureau of Economic Research, Inc.
  10. Michael Haliassos & Andrew B. Lyon, 1993. "Progressivity of Capital Gains Taxation with Optimal Portfolio Selection," NBER Working Papers 4253, National Bureau of Economic Research, Inc.
  11. V. V. Chari & Mikhail Golosov & Aleh Tsyvinski, 2005. "Business Start-ups, The Lock-in Effect, and Capital Gains Taxation," Levine's Bibliography 784828000000000439, UCLA Department of Economics.
  12. Clemens Sialm, 2006. "Investment Taxes and Equity Returns," NBER Working Papers 12146, National Bureau of Economic Research, Inc.

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