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Methods of Capital Gains Taxation and the Impact on Asset Prices and Welfare

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  • Sahm, Marco

Abstract

Taxation of capital gains upon realization instead of accrual provides incentives to hold winners as long as possible and sell losers immediately. This so–called lock–in effect possibly distorts the liquidation and investment decision and, hence, is usually regarded as harmful. This paper analyzes the impact the method of taxation has on asset prices and welfare within a simple general equilibrium model of an exchange economy with heterogeneous agents. It is shown that asset prices are higher under a realization–based tax system than under an accrual one. However, due to distributional effects, total welfare is not necessarily lower.

Suggested Citation

  • Sahm, Marco, 2008. "Methods of Capital Gains Taxation and the Impact on Asset Prices and Welfare," National Tax Journal, National Tax Association;National Tax Journal, vol. 61(4), pages 743-768, December.
    • Handle: RePEc:ntj:journl:v:61:y:2008:i:4:p:743-68
    DOI: 10.17310/ntj.2008.4.09
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    Cited by:

    1. Hegemann, Annika, 2016. "Hemmt die Veräußerungsgewinnbesteuerung unternehmerische Flexibilität?," arqus Discussion Papers in Quantitative Tax Research 203, arqus - Arbeitskreis Quantitative Steuerlehre.
    2. Serdarevic Nino & Muratovic-Dedic Ajla, 2021. "Revenue Recognition and Real Earnings Management in Bosnian Construction Industry," Journal of Forensic Accounting Profession, Sciendo, vol. 1(1), pages 21-34, June.
    3. Marco Sahm, 2009. "Imitating Accrual Taxation On A Realization Basis," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 734-761, September.
    4. Giampaolo Arachi & Massimo D'Antoni, 2022. "Taxation of capital gains upon accrual: is it really more efficient than realisation?," Fiscal Studies, John Wiley & Sons, vol. 43(1), pages 39-61, March.

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