The Efficiency Loss of Capital Income Taxation Under Imperfect Loss Offset Provisions
52 Pages Posted: 9 Sep 2009 Last revised: 22 Oct 2009
Date Written: August 20, 2009
The importance of capital loss offset provisions in a world of risk is well documented in the tax literature. However, the potential deadweight losses (DWLs) owing to imperfect offset has not been fully explored. This paper develops a framework whereby that investigation can be carried out, and utilizes numerical simulations to investigate the size of potential losses. The results obtained show that welfare losses owing to the absence of offset provisions could be substantial. Under plausible assumptions about attitudes towards risk and time preference, and with a capital income tax rate of thirty five percent, over forty five cents per dollar of tax revenue raised may be dissipated. In contrast, full loss offset may reduce that loss to approximately twelve cents.
Keywords: Capital Income Taxation, Uncertainty, Deadweight Loss, Loss Offset Provisions
JEL Classification: H00, H21, H22
Suggested Citation: Suggested Citation