Abstract
Controversy has long surrounded capital taxation. Congress has often changed effective tax rates and holding periods required for preferential tax treatment of longer term investments. The latest change-the Tax Reform Act (TRA) of 1986-eliminated preferential tax treatment of capital gains. Rationales for former preferential treatment included stimulation of capital formation, lessening tax burdens caused by bunching of gains, decreasing the tax deterrent to sale of assets (the lock-in effect), and compensating for the taxing ot phantom gains during inflationary periods.' Although disagreement abounds on how much these factors justify special tax treatment of capital gains, there is a consensus that inflation increases the effec-
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