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Inflation and the Excess Taxation of Capital Gains on Corporate Stock

  • Martin Feldstein
  • Joel Slemrod

The present study shows that in 1973 individuals paid nearly $500 million of extra tax on corporate stock capital gains because of the distorting effect of inflation. A detailed analysis shows that the distortion was greatest for middle income sellers of corporate stock. In 1973, individuals paid capital gains tax on more than $4.5 billion of nominal capital gains on corporate stock. If the costs of these shares are adjusted for the increases in the consumer price level since they were purchased, the $4.5 billion nominal gain becomes a real capital loss of nearly $1 billion. As a result of this incorrect measurement of capital gains, individuals with similar real capital gains were subject to very different total tax liabilities. These findings are based on a new body of official tax return data on individual sales of corporate stock.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0234.

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Date of creation: Feb 1978
Date of revision:
Publication status: published as Feldstein, Martin and Slemrod, Joel. "Inflation and the Excess Taxation of Capital Gains on Corporate Stock." National Tax Journal, Vol. XXXI, No.2, ( June 1978), pp. 107-118.
Handle: RePEc:nbr:nberwo:0234
Note: PE
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  1. Feldstein, Martin S, 1978. "The Welfare Cost of Capital Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S29-51, April.
  2. Feldstein, Martin S & Green, Jerry R & Sheshinski, Eytan, 1978. "Inflation and Taxes in a Growing Economy with Debt and Equity Finance," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S53-70, April.
  3. Peter A.Diamond, 1973. "Inflation and the Comprehensive Tax Base," Working papers 98, Massachusetts Institute of Technology (MIT), Department of Economics.
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