CAPITAL GAINS TAXATION AND PROGRESSIVITY

Julio López-Laborda

Working Papers from Instituto de Estudios Fiscales

Abstract: This paper measures the local and effective progression of personal income tax, considering jointly the taxation of regular income and capital gains. The study demonstrates that, if capital gains increase more than proportionally compared to individuals’ regular income, the combined tax may be locally and effectively more progressive than the tax which is applied solely to regular income; however, post-tax income inequality will be lower in the latter case. The results obtained are used to design a flat tax to substitute the current personal income tax, obtaining the parameters –tax rate and deduction from the tax base– for that tax.

Keywords: personal income tax; regular income; capital gains; flat tax; local and effective progression (search for similar items in EconPapers)
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