Notes on the Effect of Capital Gains Taxation on Non-Austrian Assets
This paper is an attempt to assess the effect of capital gains taxation on non-Austrian assets, such as claims to profits of continuing enterprises. As compared to taxation on an accrual basis, the capital gains tax discourages sales of appreciated assets. This is the "lock-in" effect. Because assets subject to capital gains taxation are generally held a long time, conventional estimates suggest that the effective rate of capital gains taxation is low. We contend that conventional estimates could seriously underestimate the effective rate of capital gains taxation because they ignore uncertainty. We construct a model which allows us to calculate the value of being able to actively manage a portfolio and use this model to calculate the effective rate of capital gains taxation. For several plausible parameter values the effective rate is significantly higher than estimates under certainty. We also discuss some of the ways in which the lock-in effect may distort the allocation of investment funds and the efficient workings of the capital market.
|Date of creation:||Feb 1985|
|Publication status:||published as Kovenock, Daniel J. and Michael Rothschild. "Notes on the Effect of Capital Gain Taxation on Non-Austrian Assets," Economic Policy in Theory and Practice, ed. by Assaf Razin and Efraim Sadka. Hong Kong: Macmillan Press Ltd. , 1987, pp. 309-339.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John L. Evans & Stephen H. Archer, 1968. "Diversification And The Reduction Of Dispersion: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 23(5), pages 761-767, December.
- Martin Feldstein & Joel Slemrod & Shlomo Yitzhaki, 1980.
"The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 94(4), pages 777-791.
- Martin Feldstein & Joel Slemrod & Shlomo Yitzhaki, 1981. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains," NBER Working Papers 0250, National Bureau of Economic Research, Inc.
- Constantinides, George M., 1984. "Optimal stock trading with personal taxes : Implications for prices and the abnormal January returns," Journal of Financial Economics, Elsevier, vol. 13(1), pages 65-89, March.
- 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.
- George M. Constantinides, 1979. "Multiperiod Consumption and Investment Behavior with Convex Transactions Costs," Management Science, INFORMS, vol. 25(11), pages 1127-1137, November.
- Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
- R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
- Choi, E. K. & Menezes, C. F., 1985. "On the magnitude of relative risk aversion," Economics Letters, Elsevier, vol. 18(2-3), pages 125-128.
- Choi, E. Kwan & Menezes, Carmen F., 1985. "On the Magnitude of Relative Risk Aversion," Staff General Research Papers Archive 10604, Iowa State University, Department of Economics.
- Goldman, M Barry, 1979. "Anti-Diversification or Optimal Programmes for Infrequently Revised Portfolios," Journal of Finance, American Finance Association, vol. 34(2), pages 505-516, May.
- Stiglitz, Joseph E., 1983. "Some aspects of the taxation of capital gains," Journal of Public Economics, Elsevier, vol. 21(2), pages 257-294, July.
- Joseph E. Stiglitz, 1983. "Some Aspects of the Taxation of Capital Gains," NBER Working Papers 1094, National Bureau of Economic Research, Inc.
- Joel Slemrod, 1978. "The Lock-In Effect of the Capital Gains Tax: Some Time Series Evidence," NBER Working Papers 0257, National Bureau of Economic Research, Inc.
- Kovenock, Daniel J. & Rothschild, Michael, 1983. "Capital gains taxation in an economy with an `Austrian sector'," Journal of Public Economics, Elsevier, vol. 21(2), pages 215-256, July.
- Daniel J. Kovenock & Michael Rothschild, 1981. "Capital Gains Taxation in an Economy with an "Austrian Sector"," NBER Working Papers 0758, National Bureau of Economic Research, Inc.
- Feldstein, Martin & Yitzhaki, Shlomo, 1978. "The effects of the capital gains tax on the selling and switching of common stock," Journal of Public Economics, Elsevier, vol. 9(1), pages 17-36, February.
- Protopapadakis, Aris, 1983. "Some Indirect Evidence on Effective Capital Gains Tax Rates," The Journal of Business, University of Chicago Press, vol. 56(2), pages 127-138, April. Full references (including those not matched with items on IDEAS)