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On the Design and Reform of Capital Gains Taxation

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  • Alan J. Auerbach

Abstract

After reviewing recent work on the feasibility of taxing capital gains on accrual or in an equivalent manner. This paper develops and presents simulations of a model of household behavior. aimed at assessing the efficiency effects of this and other tax reforms, The model accounts for the portfolio choice and intertemporal consumption distortions that capital gains taxes induce under current law. Among the simulation results are; 1. Eliminating the "lock-in" effect through a revenue-neutral move to accrual taxation causes national saving to decline, as households face a lower tax on present consumption from appreciated assets and. by reallocating existing wealth more efficiently, need to save less for future contingencies. Despite reducing saving, however. such a reform increases economic efficiency. 2. A simple reduction in the rate of capital gains taxation reduces national saving even for very high intertemporal elasticities of substitution, because of the additional income effect associated with reduced taxes on previously accumulated gains and the more efficient reallocation of existing wealth. However, making the tax cut prospective. although increasing saving. delays portfolio rebalancing and need not improve efficiency.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3967.

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Date of creation: Jan 1992
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Handle: RePEc:nbr:nberwo:3967

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  1. Alan J. Auerbach, 1988. "Capital Gains Taxation in the United States: Realizations, Revenue, and Rhetoric," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 595-638.
  2. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
  3. Poterba, James M & Summers, Lawrence H, 1986. "The Persistence of Volatility and Stock Market Fluctuations," American Economic Review, American Economic Association, vol. 76(5), pages 1142-51, December.
  4. Daniel J. Kovenock & Michael Rothschild, 1985. "Notes on the Effect of Capital Gains Taxation on Non-Austrian Assets," NBER Working Papers 1568, National Bureau of Economic Research, Inc.
  5. William Vickrey, 1939. "Averaging of Income for Income-Tax Purposes," Journal of Political Economy, University of Chicago Press, vol. 47, pages 379.
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Cited by:
  1. 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.
  2. Fischer, Carolyn & Toman, Michael & Kerr, Suzi, 1998. "Using Emissions Trading to Regulate U.S. Greenhouse Gas Emissions: An Overview of Policy Design and Implementation Issues," Discussion Papers dp-98-40, Resources For the Future.
  3. Dirk Schindler & Bodo Hilgers, 2002. "Shall We Tax the Risk Premium?," CoFE Discussion Paper 02-17, Center of Finance and Econometrics, University of Konstanz.
  4. Eduardo Engel & Alexander Galetovic, 1998. "¿Qué hacer con los impuestos que pagan las ganancias de capital en Chile?," Documentos de Trabajo 46, Centro de Economía Aplicada, Universidad de Chile.
  5. Cho, Myeonghwan, 2014. "The effect of capital gains taxation on small business transfers and start-ups," Economic Modelling, Elsevier, vol. 36(C), pages 447-454.

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