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Capital gains taxation in an economy with an `Austrian sector'

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  • Kovenock, Daniel J.
  • Rothschild, Michael

Abstract

This paper examines the effects of a proportional capital gains tax in an economy with an Austrian sector (with wine and trees) and an ordinary sector. We analyze the effect of capital gains taxation (on both an accrual and a realization basis) on the efficiency with which resources are used within the Austrian sector. Since time is the only input which can be varied in the Austrian sector this amounts to looking at the effect of capital gains taxation on the harvesting time or selling time of assets. Accrual taxation decreases the selling time of Austrian assets. Realization taxation decreases the selling time of some Austrian assets and leaves it unchanged for others. Inflation further reduces the selling time of assets taxed on an accrual basis; often, but not always, inflation increases .the selling time of Austrian assets taxed on a realization basis. These results suggest that the capital gains tax can reduce the holding period of an asset. However, there is a sense in which such taxes (at least when levied on a realization basis) discourage transactions and increase holding periods. It is never profitable to change the ownership of an Austrian asset between the time of the original investment and the ultimate harvesting of the asset for final use. We examine the effect of capital gains taxation on the efficiency of the allocation of investment between sectors. No neutrality principles emerge when ordinary investment income is taxed at the same rate as capital gains income. We also analyze the effect of the special tax treatment of capital gains at death and find that the current U.S. tax system, under which capital gains taxes are waived at death, encourages investors to hold assets longer than they otherwise would.
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  • Kovenock, Daniel J. & Rothschild, Michael, 1983. "Capital gains taxation in an economy with an `Austrian sector'," Journal of Public Economics, Elsevier, vol. 21(2), pages 215-256, July.
    • Handle: RePEc:eee:pubeco:v:21:y:1983:i:2:p:215-256
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    1. Constantinides, George M & Scholes, Myron S, 1980. "Optimal Liquidation of Assets in the Presence of Personal Taxes: Implications for Asset Pricing," Journal of Finance, American Finance Association, vol. 35(2), pages 439-449, May.
    2. Feldstein, Martin & Yitzhaki, Shlomo, 1978. "The effects of the capital gains tax on the selling and switching of common stock," Journal of Public Economics, Elsevier, vol. 9(1), pages 17-36, February.
    3. Alan J. Auerbach, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(3), pages 433-446.
    4. Martin Feldstein & Joel Slemrod & Shlomo Yitzhaki, 1980. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(4), pages 777-791.
    5. Martin Feldstein & Joel Slemrod, 1983. "Inflation and the Excess Taxation of Capital Gains on Corporate Stock," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 101-115, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Markku Ollikainen, 1998. "Sustainable Forestry: Timber Bequests, Future Generations and Optimal Tax Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 12(3), pages 255-273, October.
    2. Koskela, E. & Ollikainen, M., 2000. "Optimal Forest Taxation under Private and Social Amenity Valuation," University of Helsinki, Department of Economics 498, Department of Economics.
    3. Daniel J. Kovenock & Michael Rothschild, 1987. "Notes on the Effect of Capital Gain Taxation on Non-Austrian Assets," Palgrave Macmillan Books, in: Assaf Razin & Efraim Sadka (ed.), Economic Policy in Theory and Practice, chapter 9, pages 309-342, Palgrave Macmillan.
    4. Auten, Gerald & Joulfaian, David, 2001. "Bequest taxes and capital gains realizations," Journal of Public Economics, Elsevier, vol. 81(2), pages 213-229, August.
    5. Kenneth L. Judd, 1986. "Capital Gains Taxation by Realization in Dynamic General Equilibrium," Discussion Papers 681, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Englund, Peter, 1985. "Taxation of capital gains on owner-occupied homes," European Economic Review, Elsevier, vol. 27(3), pages 311-334.

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