Could Indexation Be a Good Way to Cut Taxes for Stock Investors?

58 Pages Posted: 18 Nov 2019 Last revised: 28 Oct 2020

See all articles by Yaoting Lei

Yaoting Lei

Nanchang University - School of Economics and Management

Jing Xu

Renmin University of China - School of Finance

Date Written: October 28, 2020

Abstract

We conduct a theoretical analysis of the capital gains indexation proposal, which proposes to cut capital gains taxes by adjusting tax basis for inflation. Our model suggests that with limited use of losses, indexation could make it optimal for the investor to hold onto gains substantially longer even when tax rates are symmetric for long-term and short-term gains. Comparing with taxing nominal gains at the long-term tax rate, taxing indexed gains at the ordinary income tax rate could better improve the investor's welfare, increase the amount of capital gains tax bills, and reduce the costliness of tax naivete simultaneously.

Keywords: Portfolio choice, Inflation risk, Capital gains tax, Capital gains indexation

JEL Classification: G11, H24, K34

Suggested Citation

Lei, Yaoting and Xu, Jing, Could Indexation Be a Good Way to Cut Taxes for Stock Investors? (October 28, 2020). Available at SSRN: https://ssrn.com/abstract=3483399 or http://dx.doi.org/10.2139/ssrn.3483399

Yaoting Lei

Nanchang University - School of Economics and Management ( email )

999 Xuefu Road
Nanchang, Jiangxi 330031
China

Jing Xu (Contact Author)

Renmin University of China - School of Finance ( email )

59 Zhongguancun Street
Beijing, 100872
China

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