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How Burdensome Are Capital Gains Taxes?

Author

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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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • James M. Poterba, 1986. "How Burdensome Are Capital Gains Taxes?," Working papers 410, Massachusetts Institute of Technology (MIT), Department of Economics.
    • Handle: RePEc:mit:worpap:410
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    Cited by:

    1. Clemens Sialm, 2006. "Investment Taxes and Equity Returns," NBER Working Papers 12146, National Bureau of Economic Research, Inc.
    2. Jongmoo Jay Choi & Frank J. Fabozzi & Uzi Yaari, 1989. "Optimum Corporate Leverage With Risky Debt: A Demand Approach," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(2), pages 129-142, June.
    3. 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.
    4. Shoven, John B. & Sialm, Clemens, 2004. "Asset location in tax-deferred and conventional savings accounts," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 23-38, January.
    5. 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.
    6. Clemens Sialm, 2005. "Tax Changes and Asset Pricing: Time-Series Evidence," NBER Working Papers 11756, National Bureau of Economic Research, Inc.
    7. 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.
    8. 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.
    9. James M. Poterba & Scott J. Weisbenner, 2001. "Capital Gains Tax Rules, Tax‐loss Trading, and Turn‐of‐the‐year Returns," Journal of Finance, American Finance Association, vol. 56(1), pages 353-368, February.
    10. Lawrence B. Lindsey, 1987. "Capital Gains Rates, Realizations, and Revenues," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 69-100, National Bureau of Economic Research, Inc.
    11. James M. Poterba, 1989. "Venture Capital and Capital Gains Taxation," NBER Chapters, in: Tax Policy and the Economy, Volume 3, pages 47-68, National Bureau of Economic Research, Inc.
    12. V. V. Chari & Mikhail Golosov & Aleh Tsyvinski, 2003. "Business Start-ups, the Lock-in Effect, and Capital Gains Taxation," Levine's Working Paper Archive 506439000000000222, David K. Levine.
    13. 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.
    14. Poterba, James M, 1987. "Tax Evasion and Capital Gains Taxation," American Economic Review, American Economic Association, vol. 77(2), pages 234-239, May.

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