Tax treatment of capital income in different inflation environments

Under most tax regimes, the tax treatment of capital income varies with both the form the income takes (e.g., interest, dividends, or capital gains) and the characteristics of the taxpayer receiving the income (e.g., filing status and other income received). Moreover, both the level and form of capital income depend on the underlying level of inflation in the economy. The 1981 Tax Act indexed the tax base and rate structure for inflation. It did nothing, however, to index capital income (tax and deduct only real interest, tax only real capital gains, and deduct tax depreciation based on replacement, rather than current, cost). In this dissertation computations are reported of the economic impacts of altered tax treatments of capital income in different inflation environments.;A portfolio-based general equilibrium simulation model is used for this study. The starting point is GEMDAT (General Equilibrium Model of Differential Asset Taxation) developed by Galper, Lucke and Toder (1988) as modified by Hendershott and Won (1991b) to incorporate tenure choice and risky housing. This model is extended to allow for risky consumer durables, nonzero covariances between pretax returns on owner-occupied and rental housing and between pretax returns on corporate and noncorporate equities, endogenous capital gains realization and corporate payout behaviors (based on Hendershott, Toder and Won, 1991), variable inflation, and an open economy.;The first simulation results indicate the economic effects of the Tax Reform Act of 1986 (TRA86) and their sensitivity to different model specifications (nonzero covariance and the openness of the economy). The second set indicates the impact of changes in inflation, assuming TRA86 is in place, and the different impacts of introducing TRA86 and of reintroducing a capital gains exclusion at different assumed inflation rates. The last set reports impacts of introducing an indexed tax system.