Are We Trapped by Our Capital Gains?

61 Pages Posted: 13 Aug 2015 Last revised: 25 Sep 2015

See all articles by Reuven S. Avi-Yonah

Reuven S. Avi-Yonah

University of Michigan Law School

Dmitry Zelik

University of Michigan at Ann Arbor

Date Written: August 17, 2015


For political reasons, we seem to be stuck with the current realization-based system of taxing capital gains. This means that lock-in is a serious problem. Inflation can be dealt with by adjusting basis and bunching by averaging devices, but it is hard to address lock-in, especially if step-up on death is retained. The current rate structure is 39.6% for ordinary income (higher if limits of deductions are taken into account) and 23.8% for capital gains. This has already led to a proliferation of conversion transactions and to pressure on the labor/capital distinction. We are doubtful that an effective centrifuge can be devised to segregate income from labor from income from capital. This may work in Sweden, but it may not work in a country like the US with a hyper-sophisticated capital market and very aggressive tax advisors.

Thus, we have reluctantly come to the conclusion that we are indeed trapped by our capital gains, that the current rate structure is indefensible in practice, and that we should revert to an overall rate of 28% for all income. The following paper summarizes the US tax rules for capital gains in more detail. As can be seen, it is a topic of considerable complexity, most of which could be eliminated if we reverted to the 1986-1990 rate structure of taxing ordinary income and capital gains the same.

Keywords: capital gains, taxation, rate structure

JEL Classification: H26

Suggested Citation

Avi-Yonah, Reuven S. and Zelik, Dmitry, Are We Trapped by Our Capital Gains? (August 17, 2015). U of Michigan Public Law Research Paper No. 476, Available at SSRN: or

Reuven S. Avi-Yonah (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-647-4033 (Phone)

Dmitry Zelik

University of Michigan at Ann Arbor ( email )

110 Tappan Hall
855 S. University Ave
Ann Arbor, MI 48109
United States

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