On the 'Lock-In' Effects of Capital Gains Taxation


Posted: 17 Jan 1997

See all articles by Yoshitsugu Kanemoto

Yoshitsugu Kanemoto

University of Tokyo - Faculty of Economics


The most important drawback of a tax on realized capital gains is its "lock-in" effect. This paper uses a simple land development model to examine the distortion that the lock-in effect generates. A surprising result is that the lock-in effect does not arise if the basis for the capital gains tax (usually the price at which the current owner acquired the land) is sufficiently high. Rather than delaying the sale, the owner sells the land as soon as possible even if the land will be developed much later. In this case, the capital gains tax creates no "real" distortion because it does not affect the development time. In particular, if the basis is the price formed under perfect foresight, the lock-in effect never arises.

JEL Classification: H29, R0

Suggested Citation

Kanemoto, Yoshitsugu, On the 'Lock-In' Effects of Capital Gains Taxation. J. OF URBAN ECONOMICS, Available at SSRN: https://ssrn.com/abstract=9208

Yoshitsugu Kanemoto (Contact Author)

University of Tokyo - Faculty of Economics ( email )

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Tokyo 113-0033
81-3-038-1221-11 (Phone)

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