This paper examines the effects of a proportional capital gains in an economy with an Austrian sector (with wine and trees) and an ordinary sector. We analyze the effect of capital gains taxation (on both an accrual and a realization basis) on the efficiency with which resources are used within the Austrian sector. Since time is the only input which can be varied in the Austrian sector, this amounts to looking at the effect of capital gains taxation on the harvesting time or selling time of assets. Accrual taxation decreases the selling time of Austrian assets. Realization taxation decreases the selling time of some Austrian assets and leaves it unchanged for others. Inflation further reduces the selling time of assets taxed on an accrual basis; often, but not always, inflation increases the selling time of Austrian assets taxed on a realization basis. We also examine the effect of the special tax treatment of capital gains at death and find that the current U.S. tax system, under which capital gains taxes are waived at death, encourages investors to hold assets longer.
Kovenock, Daniel J., and Michael Rothschild. "Capital gains taxation in an economy with an ‘Austrian sector’." Journal of Public Economics 21.2 (1983): 215-256.
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