Inflation and Capital Gains Taxes in a Small Open Economy

International Review of Economics and Finance, Vol. 9, Issue 3

Posted: 29 Jun 2000

See all articles by Charles Ka Yui Leung

Charles Ka Yui Leung

The Chinese University of Hong Kong (CUHK) - Department of Economics

Guang-Jia Zhang

Government of Canada - Department of Monetary and Financial Analysis

Abstract

As the financial markets mature in a modern economy, capital gains tax concerns arise naturally among economists as well as policy makers. This paper intends to investigate the distortions of capital gains tax in an inflationary environment. We develop a dynamic general equilibrium, life-cycle model in which capital formation or investment is an important channel for consumption smoothing. Since capital gains are taxed only at realizations, capital gains tax would distort the whole consumption path in general. In addition, inflation introduces an upward bias in the capital gains calculation and hence the co-existence of inflation and capital gains tax could amplify the distortions and leads to a great social welfare cost. We find that it is indeed the case.

Note: This is a description of the paper and not the actual abstract.

Keywords: amplifying effect, capital gains tax, inflation, welfare cost

JEL Classification: E51, E52, G18, H20

Suggested Citation

Leung, Ka Yui Charles and Zhang, Guang-Jia, Inflation and Capital Gains Taxes in a Small Open Economy. International Review of Economics and Finance, Vol. 9, Issue 3. Available at SSRN: https://ssrn.com/abstract=227835

Ka Yui Charles Leung (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong
+852-2609-7158 (Phone)
+852-2603-5805 (Fax)

HOME PAGE: http://www.cuhk.edu.hk/eco/staff/kyleung

Guang-Jia Zhang

Government of Canada - Department of Monetary and Financial Analysis ( email )

234 Wellington St.
Ottawa, Ontario K1A 0G9
Canada

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