Capital-Gains Taxation in Applied General Equilibrium

Abstract

Despite the widespread belief that taxation upon realization discourages trade, the study of its macroeconomic effects has been limited by the lack of general equilibrium models suitable for quantitative analysis of capital-gains taxation. In this paper I present a variant of the standard growth model, amended to accommodate a role for asset trading and to generate capital gains. With a reasonable parameterization and a judiciously selected realization tax policy, revenues attributable to taxes on capital-gains in the computed steady-state resemble their counterpart for the US data. I also ask whether this government policy is a tax on consumption smoothing. I proceed by studying another steady-state that attains when gains are taxed upon accrual. I find the answer to be in the affirmative. Moreover, when compared to a 28 percent realization tax rate, accrual taxation is capable of raising the same revenue with a tax rate of just 7.7 percent together with a welfare improvement.