Inflation and the Excess Taxation of Capital Gains on Corporate Stock

12 Pages Posted: 28 May 2004 Last revised: 24 Aug 2010

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER); Harvard University

Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

Date Written: February 1978

Abstract

The present study shows that in 1973 individuals paid nearly $500 million of extra tax on corporate stock capital gains because of the distorting effect of inflation. A detailed analysis shows that the distortion was greatest for middle income sellers of corporate stock. In 1973, individuals paid capital gains tax on more than $4.5 billion of nominal capital gains on corporate stock. If the costs of these shares are adjusted for the increases in the consumer price level since they were purchased, the $4.5 billion nominal gain becomes a real capital loss of nearly $1 billion. As a result of this incorrect measurement of capital gains, individuals with similar real capital gains were subject to very different total tax liabilities. These findings are based on a new body of official tax return data on individual sales of corporate stock.

Suggested Citation

Feldstein, Martin S. and Slemrod, Joel B., Inflation and the Excess Taxation of Capital Gains on Corporate Stock (February 1978). NBER Working Paper No. w0234. Available at SSRN: https://ssrn.com/abstract=260425

Martin S. Feldstein (Contact Author)

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Joel B. Slemrod

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