American Economic Association

Economic Effects of the Capital Gains Tax

Author(s): Martin David
Source: The American Economic Review, Vol. 54, No. 3, Papers and Proceedings of the
Seventy-sixth Annual Meeting of the American Economic Association (May, 1964), pp. 288-299
Published by: American Economic Association
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 ECONOMIC EFFECTS OF THE CAPITAL GAINS TAX*
By MARTIN DAVID
University of Wisconsin

An appraisal of capital gains taxation raises formidableproblems.To

know how the tax affects our economy we need to know how the tax
affects each and every saver in his investment decisions. This requires
an understanding of the investor's reaction to risky and uncertain sit-
uations, a model of the manner in which expectations for the future
are built on limited and sketchy knowledge of the present, and an ap-
praisal of the costs of making investments and investment decisions.
Indeed the economic effects of the capital gains tax go further. Prefer-
ential taxation of capital gains may affect work effort, resource alloca-
tion, the total volume of savings, the structure of industrial organiza-
tion, and other significant aspects of our economy.
What are the economic effects of capital gains taxation? The dis-
cussion here presents three aspects of these economic effects that are of
major policy importance. I shall address myself to the impact of capital
gains taxation on economic growth, the impact of capital gains taxation
on stabilization of the economy at full employment, and the impact of
the tax on efficientuse of our economic resources.
Before we proceed, it is necessary to define these terms more pre-
cisely. I use capital gains taxation to refer to the past and present U. S.
system of taxing income acquired through a variety of transactions in
real and financial assets. With the exception of the years from 1917 to
1921, this system has had four principal features:
1. The capital gains tax has been applicable to a generic classifica-
tion of transactions; the boundaries and principles establishing bound-
aries for the classification have been uncertain and arbitrary [16].
2. Holding the asset for given minimumperiods has been one of the
most important criteria delimiting favored transactions. The capital
gains tax applies differential rates to income earned on favored trans-
actions; the nature of the differentialhas varied from time to time and
has differed for personal and corporate entities.
3. The capital gains tax has not been applicable to income except
when realized in an actual transaction; this has meant that gains ac-
* This paper is an outgrowth of preparation for a research conference on capital gains
taxation. The conference is one of a series undertaken by the National Committee of
Government Finance of the Brookings Institution in connection with its program of
Studies in Government Finance which are financed by a special grant from the Ford
Foundation.
288

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 PROBLEMS IN TAXATION 289
crued on assets subject to gratuitous transfer have been exempt from
tax under income tax laws; tax on the gains accruing on securities held
over a long period of time have been applied only after considerable
postponement [14].
4. Lastly, the tax law has limited the extent to which losses on
transactions in eligible asset can be deducted from other forms of in-
come; again the form of loss deduction and its amount have varied
during the history of this law [3].
In discussing effects of capital gains taxation I shall refer to the
differentialbehavior of the economy under two tax systems: (1) a tax
system yielding revenues equal to those collected under the present
system but without the preferential features for asset transactions1
and (2) a tax system such as is actually in effect. The comparisondoes
not refer to the difference between the present tax structure and the
same structure with preferential capital gains tax provisions deleted
because a closing of all capital gains loopholes would generate different
amounts of revenue. The desirability of alternative levels of revenue
and their economic effects are issues that need not be discussed in this
paper.
I. Capital Gains atndEconomic Growth
Many arguments have been voiced to defend preferential capital
gains taxation. The argument that concerns us most asserts that prefer-
ential capital gains taxation contributes significantly to the economic
growth of our national product and its quality. The argument is sel-
dom spelled out in full, but it appears to me that the many complaints
that taxation of capital gains locks-in the investor, that payment of
such taxes draws funds away from the capi-talmarkets, that preferential
taxes are required to induce risk-taking, and that preferential capital
gains taxes are needed for a healthy capital market imply the follow-
ing economic argument [2] [5] [10] [13] [15].
Preferential taxation of capital gains reduces the effective tax rate on
income saved in the form of capital assets. On balance this discrimina-
tory subsidy will favor saving in the form of assets eligible for the low
tax rate. As a consequence (1) more funds become available in the
capital markets; (2) investors respond to the increase in the supply of
funds with increased outlays on real capital; (3) increased outlays
raise the level of capacity production and may increase the rate of de-
'Theoretically it will make some difference to our conclusions as to how the burden of
taxation is distributed in the uniform tax system proposed; we assume that progression in
the uniform system can be made to correspond to a pattern not too dissimilar to the present
rate structure on ordinary income albeit at lower rates. The change to full taxation of gains
thus implies a decrease in taxation for individuals that receive no capital gains and an in-
crease in taxation for individuals that receive a sufficiently large portion of their income
in capital gains.

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290 AMERICAN ECONOMIC ASSOCIATION

velopment of new technology and its adoption; (4) the economy bene-
fits from preferential capital gains taxation by increased economic
growth.
While this line of argument may satisfy a few economists who do
not choose to look beyond a partial equilibriumanalysis, I question its
significance. What quantitative effects on growth can we attribute to
preferential taxation? What benefits do we get from this indirect tax
device as compared to other actions to stimulate growth? Let us ex-
amine the links in the chain of argumentone by one.
First, capital gains taxation increases the volume of savings as it
discriminatesin favor of savings accumulatedin assets privileged to the
low tax. To evaluate this argumentwe must recall that this tax provides
for far more than a marginal change in rate of return. The tax has sig-
nificant income as well as substitution effects. The taxes that investors
avoid by the capital gains loophole reduce both the average rate of tax-
ation and the marginal rate applicable to capital gains. Households will
be sensitive to the difference.They will adjust work effort, consumption,
and saving in noneligible forms of investment in response to adjustments
in their income. What clues do we have as to the outcome? Break sug-
gests that for high-income groups the effective tax rate may have little
to do with work effort [4]. But that analysis speaks for the behavior of
a limited group of professional types; we can only guess about the re-
sponse of lower-echelon corporate executives and owners of small busi-
nesses to lower effective tax rates. Do they retire early, turn down post-
retirement jobs, or work shorter hours because of increases in disposa-
ble income?
Let us assume, on balance, adjustments in work effort for investors
are unimportant. What else can be said about investor's behavior?
If work effort remains constant, lower average taxes mean more dis-
posable income for the investor in capital gains; in addition low mar-
ginal taxes on additional earnings in the form of capital gains will
influence the investor's choices. Greater disposable income may be
entirely consumed, but that is most unlikely. Preferential capital gains
taxation implies greater savings among investors, provided that saving
responds elastically to increases in yield. (While this seems likely,
if target saving occurs on a sufficiently wide scale, net saving may be
interest inelastic.) The corollary of increased savings in eligible assets
surely is relatively less savings in ineligible forms. Relatively fewer
dollars are invested in savings accounts, while more dollars are in-
vested in mutual funds and stocks.
In addition to changing the volume of savings capital gains taxation
will also have an effect on the portfolio that the saver demands.
Changeover from uniform income taxation to a preferential tax for

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 PROBLEMS IN TAXATION 291
capital gains implies: (1) a lower average rate of taxation and (2)
a reduction in the loss offset permitted. Following the arguments of
Domar and Musgrave [7] and Musgrave [23] we must conclude (1)
a lower average tax reduces risk-taking, and (2) limitations on loss-
offset reduce risk-taking. If this model is adequate, a capital gains
tax probably does not increase total demand for risky assets, or total
risk-taking in the economy; i.e., income effects probably exceed
substitution effects. Rather, the reduction in government participation
in losses more than offsets the increase in private investor risk-taking.
We note that present limitations on loss offsets would be unnecessary
in a system of uniform taxation. They are made necessary by the
realization criterion for determining the timing of tax payments.
One further point must be raised. In a full employment economy
each dollar of tax subsidy favoring capital asset transactions must be
matched by a dollar of additional tax yields from other revenue
sources. Thus higher tax rates for noninvestors must be considered
as part of the general equilibrium. We have little evidence as to how
nonirnvestorsmight adjust their behavior, but it is possible that their
work effort is more sensitive to tax rates than the work effort of in-
vestors. The assembly line worker, the clerk, and the laborer gen-
erally have fewer nonmonetary benefits and derive less satisfaction
from the performance of their jobs than do the self-employed, the
executive, and the professional. In addition, job satisfaction among
less skilled workers hinges more heavily on the rate of take-home pay
for less skilled workers than for executives and professionals [8].
Studies of such groups indicate increases in absenteeism and job turn-
over with decreasing job satisfaction. Thus under a system of capital
gains taxation the losses associated with work disincentives for the
average noninvesting worker may be considerably greater than the
gains of additional investor savings [8] [17].
Let us return to the main thread of the argument. The second point
stated capital gains taxes increase the supply of savings (and, as I
have noted, may decrease aggregate demand for risky opportunities).
What impact will the increased supply have upon investment? An
increased supply of funds will mean more offers to buy both new and
existing securities, both new and existing assets. The investor is in-
different between the new issue of an old company and outstanding
equities. What becomes of additional funds supplied to the capital
market thus depends on the demand for new investment funds rela-
tive to the available supply. If there is no demand for investment
funds above and beyond the amounts that business can obtain from
internal sources such as depreciation and the retention of earnings,
the entire increase in supply of savings becomes translated into an

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292 AMERICAN ECONOMIC ASSOCIATION

increase in the price and value of existing securities. If the available

supply of funds exceeds denmandfor new investments, prices rise but
by less than in this extreme case. Conversely, if the demand for new
investment funds exceeds available supplies, equity prices fall and
divert a part of existing asset value into new investment uses.
It appears that the ultimate impact of additional savings generated
by preferential capital gains taxation on investment can only be
evaluated by a model that includes investment demand. Despite the
work of Jorgenson [11], Meyer and Kuh [20], and many others, our
knowledge of the investment function is extremely incomplete. We
do not know whether financial factors such as the availability of
funds under conditions that will not precipitate declines in stock prices
are an important or dominant element in investment demand. The
anticipated rate of consumer spending and spending for the national
product would appear to be more important factors. WNYhen spending
rates are high, plant operates near capacity. Demand for investments
is created by physical needs as well as the anticipated success of
higher quality products and more productive techniques. At the same
time the high rate of spending generates investor optimism that con-
tributes additional funds to the available supply. Business activity
results in a high level of profits and correspondingly high retained
earnings. The overall effect in the last decade has been that corporate
needs for financing new investments by new issues of securities have
not been strongly influenced by the volume of investment in new plant
and equipment. In fact, in the recession troughs of 1958 and 1961
corporate business financed a higher proportion of new investment
from new issues than in any other year but 1957.
If it is uncertain that business has large marginal needs for financ-
ing additional investments during period of peak activity and if duLr-
ing periods of slack our major economic need is for larger spending
plans rather than greater savings, where does the additional supply
of funds for investment that is generated by preferential capital gains
taxation really pay off?
The third point in the chain of reasoning that stretches between
capital gains taxation and economic growth stresses a nexus between
investment in plant and equipment and the increase in capacity GNP.
Available studies indicate that investment in construction, machinery,
and other producer durable goods plays a minor role in economic
growth. Massell [18] demonstrates that 90 percent of the growth in
output per man-hour of labor from 1919 to 1955 can be accounted for
by technological factors, information, organization and similar factors.
Only 10 percent is accounted for by increases in capital stock per
worker. Similarly Denison [6] estimates that it would take an increase

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 PROBLEMS IN TAXATION 2 93

in private investment of 1.4 percent of GNP to raise the rate of growth

by even 0.1 percentage points. If greater availability of funds could
be credited with reducing the lag between the discovery and adoption
of new techniques by two and two-thirds years, the availability of
funds could be credited with improving the rate of growth by anoLher
0.1 percentage points. Financial devices to reduce the cost of capital
appear to have little impact on growth relative to these requirements.
What about the arguments that full taxation of capital gains locks
investors into undesired portfolios? Keeps entrepreneurs from invest-
ing in risky enterprises because their funds are tied? What of the
trickle-down theory that asserts new funds are placed largely in gilt-
edged securities so that old investments must be liquidated before
additional risks are taken? These arguments highlight the fact that
the combination of full taxation of capital gains and payment of tax
at realization convert taxation from an involuntary payment into a
postponable transactions cost. The greater the transactions cost, the
greater the impediment to trading in the capital markets. Two ob-
servations seem to be in order:
First, to the extent that capital gains are taxed on an accrual basis,
no lock-in is possible. For nearly half of eligible transactions, in terms
of dollar volume, accrual taxation of capital gains could easily be ac-
complished by a year-end accounting no more difficult than an inven-
tory valuation. Publicly-traded corporate securities could be valued
on the basis of well-established market prices.2 Then the investor is
unable to postpone tax payments and can trade without being locked
in. The difficulties in valuing investments that are not readily sal-
able has lead many to believe that accrual taxation is impractical and
a prohibitive enforcement problem. Two options exist that would
deal with the problem: First, the taxpayer could be allowed the privi-
lege of paying his tax on realization if he also is willing to pay interest
on the funds he acquires through the deferment of taxes. This could
be accomplished in a rough way by taxing gains as if they accrued
at a constant rate over the period held. Alternatively, Turvey [24]
proposes that valuation of closely held investments be avoided by
direct taxation of retained earnings to the individual; this procedure
is already available to those corporations that elect to be taxed under
Subchapter S. The procedure might be modified for other corporations
that elect to allocate retained earnings to shareholders for tax pur-
poses in lieu of valuing equity holdings.
2Statistics of Income: Supplemental Report, Sales of Capital Assets Reported on Indi-
vidual Taxes for 1959, Table 2 indicates 50.1 percent of all realized net long-term capital
gains were taken on corporation stocks, U.S. obligations, and other bonds. Some of these
are undoubtedly close corporations but the overwhelming majority could be correctly
valued.

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294 AMERICAN ECONOMIC ASSOCIATION

Second, adjustment of portfolios to meet the demands for funds

from new investment undertakings is required only if the risk charac-
teristics of new investment opportunities are distributed differently
from risk preferences of current savers. If the supply of funds is
directed towards somewhat less risky holdings than the opportunities
which new investment affords, the market may still reach an equilib-
rium without major changes in the relative prices of high- and low-
risk securities. This comes about as some existing securities change
risk status with increasing maturity. The risk attaching to a security
will decline with age. Old undertakings have survived the market test
and are less likely to exhibit the unstable growth of new corporations.
As a consequence, some investors must exchange maturing,securities
for new securities in order to maintain their desired level of risk. This
turnover will accommodate certain discrepancies between the risk
preference of savers and the riskiness of new investment opportunities.
Transactions costs will limit the extent to which this roll-over of
investments accommodates differences in the character of supply and
deiemandfor funds. However, we do not know the importance of such
accommodations relative to the volume of new funds reaching the
capital market. Without some quantitative indications it is difficult
to evaluate the benefits of capital gains taxation in this context. Fur-
thermore, it does not seem appropriate to accommodate differences
in suipplyand demand, not in proportion to the discrepancy that exists,
but rather in proportion to the degree of realization of past economic
gains in the form of capital gains. In effect, preferential capital gains
taxation provides a tax subsidy to holders of existing assets in pro-
portion to income earned on those assets. This subsidy does not neces-
sarily vary in phase with the need for additional funds to finance new
investments of a risky nature.
II. Capital Gains and Stabilization
Of all the tax provisions in our arsenal of defenses against recession
and inflation, preferential capital gains taxation is perhaps the most
contrary. Taxation at the time of realization makes it possible for
investors to offset cyclical fluctuations in their tax rate. Thus tax
yields excluding capital gains taxes are more responsive to changes
in personal income than changes in tax yield as a whole [12].
In addition taxation at the time of realization limits the stabilizing
power of progressive tax rates for high-income taxpayers whose ac-
tions are more likely than the average to precipitate marked changes
in investment and consumer spending. If preferential capital gains
treatmenit of income continues, we can expect this limitation to in-
crease in its significance for the economy. The proposed 1963 tax
reforms call for a reduction in marginal tax rates for all brackets. As

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 PROBLEMS IN TAXATION 295

a consequence, individuals will experience less fluctuation in the mar-

ginal tax bite as incomes fluctuate in future years. Spending behavior
will be proportionately less responsive and the stabilizing power of
the income tax reduced from its present level.
Investors' ability to offset stabilizing changes in their tax payments
is aggravated by the fact that stock prices lead fluctuations in per-
sonal income.
If capital gains on corporate securities were taxed in full on accrual
basis, cyclical variation in stock prices would produce about perhaps
ten times as mnuchresponse in the corresponding tax yields as the
present system [1]. Response on this order could provide an extremely
useful damper on destabilizing speculative movements in the market
if full taxation also reduces the lead time between asset price move-
ments and changes in personal income. If the lead pattern is not al-
tered, full taxation of capital gains would be more destabilizing than
under the present system.
III. Capital Gains and Efficiency
Remarks on the impact of capital gains taxation on economic effi-
ciency are speculative, to say the least. H-owever,two major aspects
should be considered: First, the real costs of tax avoidance muist be
deducted from any gains that can be attributed to preferential tax-
ation. Second, preferential capital gains taxation distorts investment
and dividend policy. Such distortions may offset a large part of the
gain in market efficiencyascribed to the present system.
The capital gains loophole encourages the investor-taxpayer to buy
opportunities for earning income that yield capital gains. For ex-
ample, investment in certain industries, such as livestock and timber,
is favored over investment in retailing or manufacturing. In the
former case, the basic product can be sold at a capital gain rather
than ordinary income. As a second example, investment is channeled
through dummy corporations to permit appreciation of stocks and
reduce the proprietor's ordinary income. The result is twofold:
1. Investment is diverted into areas favored by the tax law without
regard for the economic profit that the investment yields. Profitability
of alternative investments is appraised on the basis of after-tax rate
of return; after-tax return depends on legal stipulations as to the
eligibility of receipts for capital gains taxation as well as the aggregate
of other taxable income. As a result, the valuation of alternative in-
vestments depends, not on their real return to the economy, but on a
distortion of that return induced by the tax law. Overinvestment will
occur in areas in which transactions produce current income at capital
gains rates.
2. Knowledge and execution of transactions in the legal form that

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296 AMERICAN ECONOMIC ASSOCIATION

admits of capital gains treatment requires the services of accountants,

lawyers and business management. Resources are consumed in tax
avoidance. As one tax lawyer has put it, tax benefits can be purchased
for a price. In a tax system less open to avoidance a portion of those
resources could be mobilized for the production of final goods, in-
creasing the efficiencyof the economy.
How large might such compliance costs be? My estimates are no
more than a guess, but if one assumes that private individuals spend
ten times what government spends on enforcement of capital gains
and that a fifth of tax enforcement effort is associated with preferen-
tial taxation of such gains, one must conclude that it is possible that
compliance costs for this loophole alone range as high as $1 billion.3
While this sum does not look large by comparisonwith the $30 billion
gap between present production and capacity production that would be
possible in a full employment economy, it is clearly an order of magni-
tude that should not be ignored. Time that accountants, tax services
brokers,lawyers, and governmentworkersnow spend in coping with tax
avoidance made possible by preferential capital gains provisions might
be better used in increasing cost accounting efficiency and improving
productivity of the economy.
The second aspect of efficiency mentioned relates to the impact of
capital gains taxation on corporate dividend policy, corporate invest-
ment, and the valuation of corporate securities. How are the key
corporate decisions of retention and investment affected by capital
gai-nstaxation? The following argument appears to be significant and
worth empirical investigation.
Investors in corporate securities recognize that after tax return of
securities that are otherwise equivalent will be greater, the greater
the proportion of funds that are retained in the company. Earnings
that are retained will increase the value of the share. That increase will
be taxable at preferred rates in some future period while dividends
are taxable today, this year, at ordinary rates. Investors will there-
fore prefer to supply funds to corporations with high rates of reten-
tion rather than corporations with low rates of retention.4 The cost
of capital thus favors companies that retain earnings. These same
companies can invest funds in new undertakings that will not meet
the test of the market until after a gestation period of several years.
By contrast the firm that raises its funds in the market must offer
present evidenCeto the market that funds are to be used to develop
products and capacity that will be profitable in the future. The scrutiny
'In the fiscal year 1962 IRS expenditures for administration totaled $450 million.
'In ain elegant proof that valuation of securities is independent of dividend payout,
Miller and Mtodigliani [21] [22] entirely ignore the effect of preferential capital gains taxes
on investor dividends.

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 PROBLEMS IN TAXATION 297

that new investment proposals receive in the capital market subjects

all comers to the same test of economic profitability. By contrast in-
vestment of retained funds defers scrutiny to the product market at
a later date and permits established firms to invest at less than cur-
rent market rates. Were both categories of investment demand chan-
neled to the same market, it seems likely that a more efficient alloca-
tion of investment funds could be accomplished. To the extent that
retained earnings are invested in projects that do not ultimately pro-
duce satisfactory yields while funds committed under market scrutiny
offer better returns, the present system may lead to unnecessarily high
market rates of interest. Investments covered by new issues are re-
quired to demonstrate greater profitability than investments covered
by retained earnings because the supply of funds in the market has
been limited by retention of earnings.
The contention that capital gains are required for liquidity and
turnover in the capital market thus ought to be countered by the ob-
servation that removal of preferential provisions for capital gains
would immediately increase the supply of funds available in the capi-
tal market and might potentially create an offsetting number of trans-
actions. (Both assertions require a careful econometric study of the
market before they can be validated or rejected.) The increase in
supply of funds would be derived from larger dividend payouts that
are reinvested in the market by shareholders.
IV. Proposed Changes in the Tax Treatmenit of Capital Gains
In the bill now pending before the Senate, little has been done to
develop appropriate solutions to the problem of taxing capital gains.
The major act of the House was to recognize clearly that present capi-
tal gains treatment represents a subterfuge from progressive tax rates
for the high-income taxpayer. The House established two categories
of assets eligible for preferred tax treatnment:preferred assets held
more than six months and more preferred assets held for more than
two years. Numerous transactions that had been given capital gains
treatment in the past were excluded from the more preferred class A
assets.
Apparently the authors of the bill feel that some property trans-
actions give rise to income that is more socially desirable than others
and which, therefore, should be less heavily taxed. But, there is
nowhere in the Committee report a valid justification for that distinc-
tion. The new distinction is as arbitrary as the whole capital assets
definitionand the present tax treatment.
In fact the bill now pending before Congress increases the lock-in
effect. It seems likely that investors who might have sold after six

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298 AMERICAN ECONOMIC ASSOCIATION

months will hold their assets for another eighteen months to take ad-
vantage of the more preferred rate [9]. The shrewd tax dodger who
contemplates holding his appreciated assets until death will still be
locked-in to his investment. (Admittedly he may be relieved of a
psychic burden by the fact that taxes will be applied with a 40 percent
rate of inclusion or a maximum of 21 percent tax rather than rates
applicable under the existing law, but the fact remains that complete
avoidance of tax still looks better than a 21 percent tax.)
The tax avoidance effects of capital gains taxation can only be
eliminated by taxing transactions on capital assets on the same basis
as ordinary income and eliminating the possibility of discretionary
postponement of tax by some system of accrual taxation or the recog-
nition of interest due on deferred tax liability. The Congress has
moved in the opposite direction on both counts. The new law will in-
crease the rate differential between many capital transactions and
ordinary income transactions. The new law will increase the scope for
avoiding the tax altogether by granting exemption from the tax to
certain elderly persons who sell their homes. To my knowledge no
analysis by the Administration or the Congress indicates that the pro-
posed changes in law would provide desirable economic effects in the
areas of growth, stabilization, or economic efficiency. Neither can the
equity of the proposed changes be defended. If new law goes into
effect, the scope for tax avoidance will be enlarged, the differential
between actual and nominal tax rates will remain. Taxpayer morale
will continue to wilt and the economy will continue to bear an enor-
mous burden of tax compliance costs.
To summarize,preferential capital gains taxation in its present form
is destabilizing. Whether full taxation would increase the stabilizing
process of the tax system depends on resulting changes in asset price
movements. The impact of preferential capital gains taxation on effi-
ciency is determined by a balance between real tax avoidance costs
and real economic growth that the tax may facilitate. However, it is
unclear that real economic growth induced by the tax is of any appre-
ciable magnitude. The overall impact of taxation on the amount of
saving is not known. If there is a strong effect on saving, it is unclear
how that effect will be mirrored in new investments. Much of the
saving can be absorbed in increasing asset prices. How such changes
might ultimately stimulate investment is still in the realm of contro-
versy [19]. And even if increases in investments undertaken because
of preferential taxation were to amount to as much as $1 billion a year,
the change in our rate of economic growth would be negligible. The link
between preferential capital gains taxation and important quantitative
effects on our country's growth thus appears to be one that must be
demonstrated,not merely asserted.

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 PROBLEMS IN TAXATION 299
REFERENCES
1. 15I. J. Bailey, "Capital Gains and Income Taxation" (Brookings Institution, Oct. 29,
1963, in process).
2. W. J. Blum, "A Handy Summary of the Capital Gains Arguments," Taxes, April,
1957, pp. 247-66.
3. G. F. Break, "On the Deductibility of Capital Losses under thle Income Tax," J. of
Fin., 1952, pp. 214-29.
4. -, "Income Taxes and Incentives to Work," A.E.R., Sept., 1957, pp. 529-49.
5. S. A. Brown, "The Locked-In Problem," Federal Tax Policy for Economic Growth and
Stability, Joint Committee on the Economic Report, 84th Cong., 1st Sess., Nov., 1955,
p. 367.
6. E. F. Denison, Sources of Economic Growth in the U.S., Supplementary Paper No. 13
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