On the Design and Reform of Capital Gains Taxation
AbstractAfter 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 InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3967.
Date of creation: Jan 1992
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Other versions of this item:
- Auerbach, Alan J, 1992. "On the Design and Reform of Capital-Gains Taxation," American Economic Review, American Economic Association, vol. 82(2), pages 263-67, May.
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