Notes on the Effect of Capital Gain Taxation on Non-Austrian Assets

Dan Kovenock and Michael Rothschild

Chapter 9 in Economic Policy in Theory and Practice, 1987, pp 309-342 from Palgrave Macmillan

Abstract: Abstract Capital gains taxes are different from most other taxes on capital. Because they are levied on a realisation basis, how much capital gains tax is paid depends on when an asset is sold not when the capital gain actually occurred. If you buy an asset for price P(t0) at time t0 and you sell it at T, your tax (payable at T) is τ [P(T) − P(t0)], where τ is the statutory rate of capital gains tax. This is true regardless of when the increase in value took place. That is, the tax depends only on P(t0)and P(T);it is independent of the rest of the price path P(t). If assets appreciate, the longer you hold an asset the lower the discounted value of taxes paid on increases in value which took place just after you acquired the asset. In the United States, if sale of an asset can be put off until death no capital gains taxes need be paid. Accrual taxation of capital gains would tax capital gains as they accrue. If capital gains are taxed on an accrual basis, the effect is to lower the after tax rate of return by a factor equal to the tax rate. That is, if an asset grows according to p ( t ) = p ( t 0 ) exp ∫ t 0 t a ( s ) d s ]]

Keywords: Risk Aversion; Effective Rate; Mutual Fund; Capital Gain; Relative Risk Aversion (search for similar items in EconPapers)
Date: 1987
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Working Paper: Notes on the Effect of Capital Gains Taxation on Non-Austrian Assets (1985)
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DOI: 10.1007/978-1-349-18584-9_9

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