Optimal Capital Gains Tax as an Incentive Contract

We recast optimal capital gains taxation as a moral-hazard problem: the government is a principal, the investor an agent whose unobservable investment-effort produces a noisy gain. The tax rate is the slope of a linear sharing rule. We distinguish revenue-maximizing from welfare-maximizing rates, reflecting the relative value of public-versus-private funds. Revenue-maximizing rates are high only under restrictive assumptions. Allowing for elastic investment, fiscal spillovers, growth effects, substitution toward lower-taxed assets or jurisdictions, and realization-based lock-in materially lowers optimal rates. Empirically grounded calibrations imply revenue-maximizing rates are low, often near zero, and below common statutory rates; welfare-maximizing rates are lower still.