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How Burdensome are Capital Gains Taxes?

  • James M. Poterba

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.

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File URL: http://www.nber.org/papers/w1871.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1871.

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Date of creation: Mar 1986
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Publication status: published as Poterba, James M. "How Burdensome are Capital Gains Taxes?" Journal of Public Economics, Vol. 33, No. 2, (1987), pp. 157-172.
Handle: RePEc:nbr:nberwo:1871
Note: PE
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  1. Daniel R. Feenberg, 1980. "Does the Investment Interest Limitation Explain the Existence of Dividends?," NBER Working Papers 0530, National Bureau of Economic Research, Inc.
  2. Constantinides, George M, 1983. "Capital Market Equilibrium with Personal Tax," Econometrica, Econometric Society, vol. 51(3), pages 611-36, May.
  3. Feldstein, Martin & Slemrod, Joel & Yitzhaki, Shlomo, 1980. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 777-91, June.
  4. 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.
  5. Steven Kaplan, 1981. "The Holding Period Distinction of the Capital Gains Tax," NBER Working Papers 0762, National Bureau of Economic Research, Inc.
  6. Constantinides, George M & Scholes, Myron S, 1980. " Optimal Liquidation of Assets in the Presence of Personal Taxes: Implications for Asset Pricing," Journal of Finance, American Finance Association, vol. 35(2), pages 439-49, May.
  7. King, Mervyn A. & Fullerton, Don, 2010. "The Taxation of Income from Capital," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226436319.
  8. Peterson, Pamela P. & Peterson, David R. & Ang, James S., 1985. "Direct evidence on the marginal rate of taxation on dividend income," Journal of Financial Economics, Elsevier, vol. 14(2), pages 267-282, June.
  9. Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-90, July.
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