The Impact of Capital Gains Tax Rates on Reported Wage and Salary Income
David P. Bernstein
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
Date posted: April 1, 2012