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  • Journal of Political Economy

Optimal Capital-Gains Taxation under Limited Information

By: Jerry R. Green and Eytan Sheshinski
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Abstract

Taxation of capital gains at realization may distort individuals' decisions regarding holding or selling during an asset's lifetime. This creates the problem of designing a tax structure for capital gains so as to induce efficient patterns of holding and selling. Several tax structures are explored in this paper. Linear taxation, at rates which rise with the holding period, can achieve the first best, even under the conditions of limited information that we postulate. The form of the optimal tax is independent of the stochastic structure of rates of return. We also derive the optimal nonlinear tax under the constraint that it be independent of the holding period. Second-best tax rules are examined. Results in a two-period model are contrasted with those in a continuous time frame- work. Also treated is the case in which the returns to the asset under consideration depend on the aggregate quantity invested.

Keywords

Capital Gains; Optimal Taxation; Taxation

Citation

Green, Jerry R., and Eytan Sheshinski. "Optimal Capital-Gains Taxation under Limited Information." Journal of Political Economy 86, no. 6 (December 1978): 1143–1158.
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About The Author

Jerry R. Green

Negotiation, Organizations & Markets
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  • Assent-maximizing Social Choice By: Katherine A. Baldiga and Jerry R. Green
  • Let the Right One In: A Microeconomic Approach to Partner Choice in Mutualisms By: Marco Archetti, Francisco Ubeda, Drew Fudenberg, Jerry R. Green, Naomi E. Pierce and Douglas W. Yu
  • Choice-based Measures of Conflict in Preferences By: Katherine Baldiga and Jerry R. Green
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