Could Indexation Be a Good Way to Cut Taxes for Stock Investors?
58 Pages Posted: 18 Nov 2019 Last revised: 28 Oct 2020
Date Written: October 28, 2020
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: Suggested Citation