On the Design and Reform of Capital Gains Taxation

15 Pages Posted: 10 Jul 2007

See all articles by Alan J. Auerbach

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: January 1992

Abstract

After reviewing recent work on the feasibility of taxing capital gains on accrual or in an equivalent manner. This paper develops and presents simulations of a model of household behavior. aimed at assessing the efficiency effects of this and other tax reforms, The model accounts for the portfolio choice and intertemporal consumption distortions that capital gains taxes induce under current law. Among the simulation results are; 1. Eliminating the "lock-in" effect through a revenue-neutral move to accrual taxation causes national saving to decline, as households face a lower tax on present consumption from appreciated assets and. by reallocating existing wealth more efficiently, need to save less for future contingencies. Despite reducing saving, however. such a reform increases economic efficiency. 2. A simple reduction in the rate of capital gains taxation reduces national saving even for very high intertemporal elasticities of substitution, because of the additional income effect associated with reduced taxes on previously accumulated gains and the more efficient reallocation of existing wealth. However, making the tax cut prospective. although increasing saving. delays portfolio rebalancing and need not improve efficiency.

Suggested Citation

Auerbach, Alan Jeffrey, On the Design and Reform of Capital Gains Taxation (January 1992). NBER Working Paper No. w3967. Available at SSRN: https://ssrn.com/abstract=476131

Alan Jeffrey Auerbach (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Germany

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