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Inflation and the Excess Taxation of Capital Gains on Corporate Stock
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Abstract
The present study shows that in 1973 individuals paid nearly 500millionofextrataxoncorporatestockcapitalgainsbecauseofthedistortingeffectofinflation.Adetailedanalysisshowsthatthedistortionwasgreatestformiddleincomesellersofcorporatestock.In1973,individualspaidcapitalgainstaxonmorethan4.5 billion of nominal capital gains on corporate stock. If the costs of these shares are adjusted for the increases in the consumer price level since they were purchased, the 4.5billionnominalgainbecomesarealcapitallossofnearly1 billion. As a result of this incorrect measurement of capital gains, individuals with similar real capital gains were subject to very different total tax liabilities. These findings are based on a new body of official tax return data on individual sales of corporate stock.