A perpetual policy debate surrounds the proper taxation of capital gains. One concern is that the tax creates a "lock-in effect." That is, people will hold onto assets longer than they otherwise would in order to avoid the tax. If significant, the lock-in effect would represent an undesirable tax distortion in its own right. It might also mean that cuts in capital gains tax rates could pay for themselves, because the added revenues from induced realizations would offset the loss due to the rate cut.
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