An Empirical Investigation Into the Effects on Tax Equity of Selected Alternative Methods of Taxing Capital Gains and Losses

This study performed an empirical investigation of the effect of alternative tax treatments of capital assets on tax equity as defined by selected definitions. The data source for this study was the Internal Revenue Service Individual Tax Model Tapes for tax year 1975. The five alternative tax treatments used were (1) the 1975 Code rules, (2) the 1980 Code rules, (3) including no capital gains and deducting no capital losses in the computation of taxable income, (4) prorating the fully included capital gains and losses in a procedure similar to income averaging, and (5) treating all realized capital gains and losses as ordinary gains and losses. Three equity concepts were developed for purposes of assigning taxpayers to equal circumstances groups. Since income was used as a measure of economic well-being and ability to pay, different concepts of equity resulted in different views of what should be included in income. The three equity income concepts used for assignment to equal circumstance groups were (1) using 1975 AGI, (2) recomputing AGI excluding all capital gains and deducting no capital losses, and (3) extending AGI to include all capital gains and deduct all capital losses. Each of the 95,073 single and married taxpayers filing jointly on the tapes were grouped according to filing status and assigned to one of eight income groupings. The individual's tax liability was computed once under each of the five alternative treatments. As different equity concepts were considered, some individuals were reassigned to different equal circumstance groups. The coefficient of variations and effective rates of the alternatives were analyzed to evaluate the horizontal and vertical equity of the alternatives under each equity concept. The tax treatment which appeared most equitable depended upon the equity concept selected for making group assignments. The best compromise alternative appeared to be the proration of gains and losses. The study provides an empirical foundation for tax policy decisions; however, any changes will remain a political process.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Accountancy

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2014

Author dc:creator

• Cairns, Scott Neil

• Business Administration, Accounting

Identifier

(UMI)AAI8409880

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/71378