Is Income From Capital Subject To Individual Income Taxation?

Abstract

Although real capital income from certain sources may be subject to tax at very high rates in an inflationary economy, this article suggests that individuals avoid individual income taxation on most capital income by saving in tax- preferred assets, and by not realizing or not reporting capital income. It is found that the average marginal rate of federal individual income tax on all capital income is about 9%. Additionally, the net amount of income from capital reported on individual returns is less than one-third of net income from capital (excluding inflationary returns) in the economy. For nominal capital income, both the inclusion rate and the average marginal rate are much lower.