And in order to assure that no tax is owed on fictitious income, the value of the capital asset should be indexed for inflation, or, if this is too complex, an exclusion should be given. Effects on Productivity. The distortions caused by the taxation of inflationary or non-existent gains lead to a decline in productivity in the economy. Since capital assets are prevented from reaching their most productive resources, the allocation of resources in the economy is unbalanced. As a result, labor productivity and economic growth are diminished from their optimal levels.
Budgetary policy plays a major role in determining tax policy.
While a reduction in the capital gains tax rate may have persuasive efficiency and equity supporting arguments, budget policy may limit the opportunity to reduce the tax rate. No one knows with certainty. These tables may be of academic interest, but they provide a measure of our ignorance rather than a prototype for tax policy, and should be treated with skepticism. As I mentioned above, evidence shows that capital gains assets are held throughout the income spectrum, and that all taxpayers would gain from lowering the rates. Despite their shortcomings, income distribution tables are increasingly becoming central to formulating new tax legislation.