The case for heavier capital gains taxation.
Folsom, Roger Nils
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Unless tax policy is evaluated not only from a short-run macroeconomic fiscal policy standpoint but also from a longer-run microeconomic policy standpoint that considers taxation's effects upon equity and resource allocation efficiency, federal taxation's unnecessary excess burden will become no lighter and may grow heavier. This paper attempts to redress the balance of the current federal personal and corporate income tax reform discussion, which has paid minimal attention to the case for heavier capital gains taxation. It reviews the capital gains tax policy literature, argues that present tax law's special treatment of capital gains and losses (compared with its treatment of ordinary income and loss) is not justified, and offers specific recommendations for taxing capital gains more heavily. Special treatment is horizontally and vertically inequitable. It is a major cause of income tax law complexity. And it misallocates the resources invested in new physical capital, by distorting taxpayers' financial decisions and disrupting movements of financial capital, more seriously than heavier capital gains taxation would. Capital gains tax reform should decrease the differential between the effective tax rates on capital gains and ordinary income, and narrow the legal definition of capital assets qualifying for special treatment.
This paper was presented to the Forty-Fourth Annual Meeting of the Western Economic Association, "Tax Reform and Voting" concurrent session VII at 10:30 a.m. Thursday 21 August 1969, and is abstracted in the Western Economic Journal , VII No. 4 (September 1969).
NPS Report NumberNPS-62F 9081A
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