INFLATION, DEFERRAL AND THE NEUTRAL TAXATION OF CAPITAL GAINS

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Abstract
Under current tax law, real income accrued as capital gains is not taxed neutrally. An inflation distortion penalizes and a tax deferral distortion benefits the recipient of gains. This study first demonstrates the impossibility of compensating for these contrasting effects through inclusion of a fixed proportion of nominal, realized gains and then suggests an alternative: the asset purchase price could be adjusted for inflation and the resultant, calculated gain could be included in taxable income at a multiple determined by the length of the period elapsing between accrual and tax payment and by the average real rate of capital appreciation.

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