The Impact of Capital Gains Tax Rates on Reported Wage and Salary Income

David P. Bernstein

U.S. Treasury Department


Preferential treatment of capital gains may enable individuals who have some control over the form of their compensation to decrease wages and increase non-wage compensation while maintaining their current level of consumption and liquidity. This effect is likely to be most pronounced for high-income executives who can contribute to incentive stock option plans. Empirical results presented in this paper indicate low capital gains tax rates appear to significantly reduce reported wage and salary income. Failure to account for the preferential treatment of capital gains on reported wages and salaries results in an underestimation of the loss of revenue stemming from a reduction in the marginal tax rate on capital gains.

Number of Pages in PDF File: 22

Keywords: taxes, capital gains, wages, compensation, marginal tax rates

JEL Classification: E62, H62, H24, J32, J20

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Date posted: April 1, 2012  

Suggested Citation

Bernstein, David P., The Impact of Capital Gains Tax Rates on Reported Wage and Salary Income (1995). Available at SSRN: http://ssrn.com/abstract=2031750 or http://dx.doi.org/10.2139/ssrn.2031750

Contact Information

David P. Bernstein (Contact Author)
U.S. Treasury Department ( email )
1500 Pennsylvania Ave., NW
Washington, DC 20220
United States
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