How Taxes Affect Economic Behavior

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

JOSEPH J. MINARIK


Capital Gains

FEDERAL income tax treatment of capital gains is highly controversial. Long-standing equity and administrative issues continue to arouse heated debate: whether capital gains should be taxed at all; what preferential treatment, if any, gains should be given relative to ordinary income; to what extent net losses should be deducted from ordinary income; whether appreciated gifts and bequests should be taxed, or what basis they should carry to recipients; and many more. But perhaps because of the sluggish progress of the U.S. economy, the effect of capital gains taxation on economic growth and efficiency has claimed a great deal of attention. Economists and laymen argue about whether capital gains taxation reduces capital investment or distorts its allocation, thereby slowing the rate of growth of output and productivity. These questions were discussed during the congressional deliberations in 1978 that yielded significant reductions in the taxation of capital gains, and widely disseminated economic analyses of these issues may have had an important influence on the legislative outcome. The influence of capital gains taxation on the economy must be understood to evaluate the 1978 decision and to choose appropriate future policy; the purpose of this paper is to increase this understanding.

____________________
I am grateful to Gerald E. Auten, Barry Bosworth, Ralph B. Bristol, Jr., John A. Brittain, Harvey Galper, Robert W. Hartman, Jerry A. Hausman, Bruce K. MacLaury, Benjamin A. Okner, Arthur M. Okun, Joseph A. Pechman, George L. Perry, and Emil M. Sunley for their helpful suggestions; to Timothy A. Cohn, Katharine J. Newman, and Laurent R. Ross for research assistance; and to Arthur Morton and Nancy E. O'Hara, who supervised the computer programming. Support for this research was provided by the National Science Foundation; support for research using the IRS Seven-Year Panel of Taxpayers was provided by the U.S. Treasury Department.

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