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INDEXATION OF CAPITAL GAINS AND LOSSES: A COMPLEXITY STUDY (TAXATION, REFORM, SIMPLICITY)

JUDITH ELLEN WATANABE, University of Nebraska - Lincoln

Abstract

Since 1921, when special provisions for capital gains and losses were first adopted, these provisions have been subject to continuous modifications. The modifications reflect Congressional responses to taxpayers dissatisfied with inequitable laws and to pressure groups seeking special tax benefits. Many feel the resulting complex tax law is an intolerable burden to the average taxpayer. Indexing has been suggested as a solution to inequities created by inflation. Although some authors feel that indexation would result in less complexity, others disagree. The present study compares the complexity under current law with the complexity which would be introduced if indexation was used for all capital asset transactions. This study differs from earlier ones in that it measures tax complexity as experienced by the taxpayer. Complexity is defined as a function of taxpayer errors and time. The time/error dimension of tax complexity is explored by examining four decision frames. The frames are composed of parallel (present and indexation methods) test instruments which include pertinent facts and required computations for capital asset transactions common to the individual taxpayer. The test instruments were completed by University of Nebraska at Omaha faculty, staff, and students. All but four of the 142 participants had filed 1984 tax returns. A Time/Error Complexity index, expressing the relationship of the present method to indexation weighted for time and errors, is used for analysis. Relatively more complexity was experienced by the subjects under the present method than under indexation. The Wilcoxon ranked-sum test confirms the Time/Error Complexity index results. At a 99 percent confidence level, there is a statistically significant difference between the two methods: the present method is more complex than the indexation method in three out of the four decision frames and for all frames combined. The complexity in current law pertaining to the capital gain and loss provisions examined in this study is greater than the complexity which would be introduced if an indexation method was adopted for capital gain taxation.

Subject Area

Accounting

Recommended Citation

WATANABE, JUDITH ELLEN, "INDEXATION OF CAPITAL GAINS AND LOSSES: A COMPLEXITY STUDY (TAXATION, REFORM, SIMPLICITY)" (1985). ETD collection for University of Nebraska-Lincoln. AAI8602122.
https://digitalcommons.unl.edu/dissertations/AAI8602122

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