Some Indirect Evidence on Effective Capital Gains Tax Rates

Abstract

This paper presents estimates of effective marginal tax rates on capital gains, excluding housing, between 1960 and 1978, in the United States. Concern that the inflation of the 1970s may have worked through the tax system to reduce incentives to produce and save has focused attention on the effective marginal tax rates that apply to various sources of income. Joines (1981) sheds light on this issue by calculating the historical effective marginal tax rates on factor incomes for the United States. Part of the recent debate, however, has focused specifically on capital gains taxes and the desirability of reducing them to enhance incentives for saving and investment. The effective marginal tax rate on capital gains (henceforth EMTG) may be the most difficult rate to measure. In addition to the usual problems of how to attribute deductions, exclusions, and tax credits, further adjustment must be made because investors pay taxes only when they realize their capital gains.1 The expected EMTG This paper reports estimates of effective marginal tax rates on capital gains by comparing reported capital gains with total capital gains on an annual basis. The estimates show that the effective marginal tax rates on capital gains fluctuated between 3.4% and 6.6% between 1960 and 1978 and that capital gains are held, on average, between 24 and 31 years before they are reported.