How Taxes Affect Economic Behavior

By Henry J. Aaron; Joseph A. Pechman | Go to book overview

to be a small segment of the population (those with stock portfolios larger than $600,000). As a result, the capital gains tax reduction in 1978 reduced tax revenues on balance.


Appendix A: History of the Capital Gains Tax Provisions

This appendix provides a brief history of the treatment of capital gains under the federal individual income tax. The discussion is limited to the required holding period for preferential treatment; the fraction of capital gains included in adjusted gross income; alternative or additional taxes on gains; the treatment of capital losses; the definition of assets eligible for capital gains treatment; and the deferral of tax on realized gains.41.

A summary of the holding period, inclusion, alternative tax, and loss- offset provisions is presented in table 11. The capital gains preference has taken the form of an exclusion of part of the gain from adjusted gross income and a limited maximum rate of tax on the gain, provided the gain has been held for some minimum length of time. As is evident from the table, both the minimum holding period required to qualify for the exclusion and the rate of the exclusion itself have changed considerably over the history of the individual income tax. From the introduction of the income tax in 1913 until 1921 there was no preference. In 1922, a 12 1/2 percent alternative tax rate for gains on assets held at least two years was introduced. From 1934 through 1937 long-term gains fell into four categories according to the length of holding period; the longer an asset was held, the smaller the portion of the gain included in taxable income. From 1938 through 1941 there were two categories of long-term gains, with the inclusion rate again lower for assets held longer. The simple long-term- short-term dichotomy was reinstated in 1942 and has endured. In addition to the exclusion, a maximum tax rate on gains was in effect from 1938 until 1968, varying from 15 to 26 percent. Under the 1969 act the maximum rate of 25 percent was restricted to the first $50,000 of long- term gain; it was repealed entirely for tax years beginning in 1979.

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41.
More complete, though dated, treatments of these questions are available in David, Alternative Approaches to Capital Gains Taxation; and The Federal Tax System: Facts and Problems, Committee Print, Joint Economic Committee, 88 Cong. 2 sess. ( GPO, 1964).

-268-

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