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Capital gains taxation and tax reform
... Tax authorities adopt a wide variety of capital gains tax rules and tax capital gains either at the progressive marginal income tax rate (for example, in Canada, Australia, and short-term gains in the U.S.) or at a proportional tax rate (Finland, Japan or long-term gains in the U.S.). 1 As capital gains are taxed upon realization, individuals are able to lower their effective tax burden by postponing realization. This " lock-in effect " and the effect on trading decisions and asset prices has been addressed in theoretical (see, among others, Constantinides, 1983; Auerbach, 1989, 1991; Klein, 1999; Poterba, 2002; Shackelford and Verrecchia, 2002; Auerbach and Bradford, 2004) as well as empirical studies (for example, Burman and Randolph, 1994; Lang and Shackelford, 2000; Seida and Wempe, 2000; Poterba and Weisbenner, 2001; Ivkovi´c, Poterba, ...
... Tax authorities adopt a wide variety of capital gains tax rules and tax capital gains either at the progressive marginal income tax rate (for example, in Canada, Australia, and short-term gains in the U.S.) or at a proportional tax rate (Finland, Japan or long-term gains in the U.S.). 1 As capital gains are taxed upon realization, individuals are able to lower their effective tax burden by postponing realization. This " lock-in effect " and the effect on trading decisions and asset prices has been addressed in theoretical (see, among others, Constantinides, 1983; Auerbach, 1989 Auerbach, , 1991 Klein, 1999; Poterba, 2002; Shackelford and Verrecchia, 2002; Auerbach and Bradford, 2004) as well as empirical studies (for example, Burman and Randolph, 1994; Lang and Shackelford, 2000; Seida and Wempe, 2000; Poterba and Weisbenner, 2001; Ivkovi´cIvkovi´c, Poterba, and Weisbenner, 2005; Dai, Maydew, Shackelford, and Zhang, 2008; Sialm, 2009 for the U.S. and Daunfeldt, Praski-Ståhlgren, and Rudholm, 2010 for Sweden). Despite general agreement that taxes affect individual portfolio decisions, little is known about the impact of different tax regimes on individual capital gains realizations over the individual's life cycle, and the heterogeneity in capital gains elasticities across individuals. ...
... The sample contains the 10% largest negative and 10% largest positive income deviations from the three-year average in each year. 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Bottom Quintile Top Quintile ...
This paper contrasts the individual capital gains realization behavior between progressive and proportional tax regimes. Using a longitudinal panel of over 288,000 individuals in Sweden, I exploit the 1991 tax reform in Sweden that changed progressive capital gains tax rates ranging from 12\% to 80\% to a proportional tax rate of 30\%. Using the proportional tax system to control for non-tax reasons to realize capital gains, I show that individuals are highly responsive to capital gains tax incentives created by temporary income changes under a progressive capital gains tax. More specifically, I find that individuals with temporary negative (positive) income changes sell (hold) shares that they would hold (sell) in the absence of temporary tax incentives. Further, I show that high-income individuals are more tax sensitive than low-income individuals. This result indicates that low-income individuals facing temporary negative income changes could trade predominantly for non-tax reasons.
... This appendix describes and updates the asset turnover model in Auerbach (1989), which we use to relate capital gains elasticities to changes in investor behavior. The two key parameters are f , which is the fraction of assets that never face capital gains, and δ, which is the fraction of assets that face capital gains and are sold every year. ...
... (A.1) Auerbach (1989) shows that one can express the steady-state ratio of realizations to sales at each date: ...
... Lindsey (1987), the Congressional Budget Office (1988), Darby, Gillingham and Greenlees (1988), and Auerbach (1989) ...
... Using these values of c1 implies payout responses to the capital gains tax cut that are more in line with the estimated relationship of the payout rate to e than to DIVCOST. Footnotes 1Auerbach (1989) notes that optimal tax planning might lead households to time realizations of losses and gains to avoid gains taxes costlessly. He also reports evidence that households do not do this in a major way and thus that the efficiency losses owing to "lock-ins' are important. ...
... A semilog functional form of the model is used . The semilog functional form, log of the capital gains dependent variable and log of micro-and macroeconomic independent variables, has been used in prior research examining individual capital gains realization response (Auten & Clotfelter, 1982 ;Lindsey, 1987 ;Auerbach, 1988 ;Auerbach, 1989 ;Burman et al ., 1994) . In these studies, a semilog model explained a significant portion of the variation in capital gains . ...
... measure of capital gains (capital gains yield), is also highest in1986 and 1987 . 12 . Taking the antilog of the estimated coefficient of MTRI (i .e . e""= 1 .25) .REFERENCESAuerbach, A . J. (1988). Capital gains taxation in the United States : Realizations, revenue and rhetoric . Brookings Papers on Economic Activity, 2, 595-637 .Auerbach, A. J . (1989). Capital gains taxation and tax reform. National Tax Journal, (September) .391-401 .Auerbach, A . J . (1991). Retrospective capital gains taxation, The American Economic Review, 81(1), 167-178 .Auten, G . E ., & Clotfelter, C. T . (1982). Permanent versus transitory tax effects and the realization of capital gains . The Quarterly Journa ...
The replacement of the book-income adjustment (BIA) component of the corporate alternative minimum tax (AMT) formula with the adjusted current earnings (ACE) component in 1990 increased the effective tax rate on interest income from municipal bonds and lowered the yield on municipal bonds relative to taxable bonds. This study assesses the effects of the replacement of the BIA with the ACE on municipal bond holdings for a sample of 72 banks over the 1987–1993 period. Results show that banks that were likely to pay the AMT held significantly lower amounts of municipal bonds in the period following the enactment of the ACE adjustment than banks that were likely to pay the regular tax.
... c impact of current income and capital gains taxation. E.g., Stiglitz (1969) investigates the effects of capital gains taxes on demand for risky assets. Pye (1972) shows that preferential capital gains taxation influences optimal dividend policy. Balcer (1983) integrates capital gains tax and tax on dividends and thereby derives a neutral tax rule. Auerbach (1989; 1991) discusses the distortions associated with capital gains taxes, and proposes a capital gains tax system that eliminates the incentive to defer the realization of gains which does not require unobservable knowledge. Bradford (1996) extends this work to financial instruments. König and Wosnitza (2000) demonstrate the power of capital ...
... They also show that this distorting effect can be avoided by implementing a modified capital gains taxation or, as Maiterth and Müller (1999) and Schreiber and Rogall (2000) prove, by current-value depreciation. For the lock-in effect of capital gains taxation see, e.g., Auerbach (1989; 1991); Landsman and Shackelford (1995); Klein (1999; Viard (2000); Dhaliwal, Erickson, and Heitzman (2004). For T < ∞ we find: We determine V 0 by the present value of after tax dividends in the interval [1, z], and the present value of price V z and of capital gains tax on the capital gain V z − I 0 at time t = z. ...
We investigate the influence of different systems of current income and capital gains taxation on investors’ decisions to either invest in corporate shares or to invest funds on the capital market. We analyze three basic tax systems. We show that even under certainty, we cannot derive general analytical solutions to the investment problem for different categories of tax regimes. Using a growth model, under restrictive assumptions we find that the shareholder relief system results in more severe distortions than does the full imputation system. In an attempt to prove this finding in a more realistic setting with uncertainty, we use Monte Carlo simulation for random rates of return and random income tax rates. We find that tax-induced uncertainty and distortion is often higher under a shareholder relief system than under full imputation, but find opposite results for low income tax rates if either the retention rate is low or income tax rates are subject to high degrees of uncertainty. These results contradict the traditional view of full imputation and suggest that under uncertainty, full imputation may cause more severe distortions than would shareholder relief, especially if personal income tax rates are low and volatile. This result is important, because simulated low income tax rates correspond to empirical rates. Furthermore, the simulation clarifies the trade-off between opposing effects, i.e., tax and interest-rate effects, and the overwhelming impact of capital gains taxation. Apart from tax parameters, we identify the dividend rate and the point in time of selling the shares as important value drivers.
... Lindsey (1987), the Congressional Budget Office (1988), Darby, Gillingham and Greenlees (1988), and Auerbach (1989) ...
... Using these values of c1 implies payout responses to the capital gains tax cut that are more in line with the estimated relationship of the payout rate to e than to DIVCOST. Footnotes 1Auerbach (1989) notes that optimal tax planning might lead households to time realizations of losses and gains to avoid gains taxes costlessly. He also reports evidence that households do not do this in a major way and thus that the efficiency losses owing to "lock-ins' are important. ...
This paper uses a general equilibrium model to simulate both the effects of a preferential capital-gains tax rate on total income tax revenues and the effects of a revenue-neutral substitution between a capital gains preference and marginal income tax rates on economic efficiency and the distribution of income. In the simulations, a capital gains preference increases efficiency by reducing tax distortions between untaxed assets (household and state and local capital) and taxable business sector assets and between realized and unrealized capital gains (the "lock-in" effect), but reduces efficiency by increasing tax distortions between corporate dividends and retained earnings and between financial assets that produce capital gain income and those that produce ordinary income. Because the model treats aggregate factor supplies as fixed, however, the simulations do not capture the efficiency gain from reducing the tax distortion between current and future consumption or the loss from increasing the tax distortion between current consumption and leisure (or untaxed labor). The net estimated welfare effects depend on two parameters: the elasticity of capital gains realizations with respect to a change in the capital gains tax rate and the elasticity of the dividend-payout ratio with respect to a change in the tax cost of dividends relative to retentions. With no payout response, the net welfare effect from a 15% maximum rate on capital gains is positive for a wide range of realizations elasticities. With a high payout elasticity, the net welfare effect is slightly positive for high estimates of the realizations elasticity and slightly negative for low estimates of the realizations elasticity. The welfare changes, both positive and negative, mainly affect taxpayers with income of $50,000 and over.
... A temporary tax reduction decreases the tax liability from an immediate sale of assets, providing the investors with the tool to postpone the budget revenue. Several studies show that permanent changes in tax rates are not expected to lead to a permanent response of capital gains realisations (Auerbach, 1989). ...
The VAT Directive provides a flexible regulatory framework for the treatment as single taxable persons of any persons who, while legally independent, are closely bound to one another by financial, economic and organizational links. Therefore, formal or informal groups can become single taxable persons, as long as the criterion of a close bond between composing entities is proven. The present study aims at analyzing the concept of “VAT group” by putting under the magnifying glass the financial, economic or organizational link and the flexibility of this binder. The issue becomes relevant especially when it comes to operations taking place within the group, reason for which our study also analyzes the VAT regime applicable to these operations.
... A temporary tax reduction decreases the tax liability from an immediate sale of assets, providing the investors with the tool to postpone the budget revenue. Several studies show that permanent changes in tax rates are not expected to lead to a permanent response of capital gains realisations (Auerbach, 1989). ...
The present paper carries on with our previous research on green finance and sustainable development, highlighting the evolution of green finance during COVID-19 pandemic. A challenge such as sustainable development in times of pandemic is something that
humankind did not face in modern era, if ever. Mixed signals from the global market and lack of data during these couple of years had generated fear, confusion and indecision in taking major economic steps in order to surpass the problems created by the social and,
in some respect, economic lock-down. But, in spite of all of these shortcomings, maybe this is the time when we need to be bold and move towards a sustainable economy that relies much more than before on green finance.
The article is focusing on the potential link between the pandemic and the economic decline of the EU-27 common market and on the evolution of green finance instruments, such as bonds, in the same context, in order to prove the necessity of a renewed sustainable
financial strategy meant to bring a much needed environmental protection boost to our planet and our lives.
... A temporary tax reduction decreases the tax liability from an immediate sale of assets, providing the investors with the tool to postpone the budget revenue. Several studies show that permanent changes in tax rates are not expected to lead to a permanent response of capital gains realisations (Auerbach, 1989). ...
The conference volume is at the fifth edition and is a continuation of activities (post-implementation) sustained by the European Programme, Jean Monnet Chair EU Financial Regulation, financed by European Commission.
... A temporary tax reduction decreases the tax liability from an immediate sale of assets, providing the investors the opportunity of gaining from timing. Several studies show that permanent changes in tax rates are not expected to lead to a permanent response of capital gains realisations (Auerbach, 1989). ...
... Several analytical and empirical studies have investigated the impact of taxation on investment in corporate stocks and asset prices, particularly of the effects that arise from capital gains taxation (Feldstein et al. 1980;Bradford 1981;Stiglitz 1983;Auerbach 1989Auerbach , 1991Lang and Shackelford 2000;Blouin et al. 2002;Ayers et al. 2003;Guenther and Sansing 2006;Dai et al. 2008;Becker et al. 2013;Campbell et al. 2013). The literature provides evidence that stock prices react to capital gains tax rate changes. ...
Investments with exit flexibility require decisions regarding both the investment and holding period. Because selling an investment often leads to taxable capital gains, which crucially depend on the duration of an investment, we investigate the impact of capital gains taxation on exit timing under different tax systems. We observed that capital gains taxation delays exit decisions but loses its decision relevance for very long holdings. Often the optimal exit time, which indicates the maximal present value of future cashflows, cannot be determined analytically. However, we identify the breakeven exit time that guarantees present values exceeding those of an immediate sale. While, after-taxes, an immediate sale is often optimal, long holding periods might also be attractive for investors depending on the degree of income and corporate tax integration. A classic corporate tax system often indicates holdings over more than 100 periods. By contrast, a shareholder relief system indicates the earliest breakeven exit time and thus the highest level of exit timing flexibility. Surprisingly, high retention rates are likely to accelerate sales under a classic corporate system. Additionally, the worst exit time, which should be avoided by investors, differs tremendously across tax systems. For an integrated tax system with full imputation, the worst time is reached earlier than under partial or non-integrated systems. These results could help to predict investors’ behavior regarding changes in capital gains taxation and thus are of interest for both investors and tax policymakers. Furthermore, the results emphasize the need to control for the underlying tax system in cross-country empirical studies.
... To what extent does the underlying tax system, i.e., the integration of corporate tax into the income tax impact the effect of capital gains taxation on the holding period? Several analytical and empirical studies investigate the impact of taxation on investment in corporate stocks and asset prices, particularly of the effects that arise from capital gains taxation (Feldstein et al 1980; Bradford 1981; Stiglitz 1983; Auerbach 1989; Auerbach 1991; Lang and Shackelford 2000; Blouin et al 2002; Ayers et al 2003; Guenther and Sansing 2006; Dai et al 2008; Becker et al 2013; Campbell et al 2013;vestments under a full imputation system, the shareholder relief and a classical tax system. 1 Knoll and Wenger (2007) find that the introduction of a flat tax on dividends particularly discriminates private domestic equity investors in high tax brackets. ...
Investments with exit flexibility require decisions regarding both the Investment and holding period. Because selling an investment often leads to taxable capital gains, which crucially depend on the duration of an investment, we investigate the impact of capital gains taxation on exit timing under different tax systems. We observed that capital gains taxation delays exit decisions but loses its decision relevance for very long holdings. Often the optimal exit time, which indicates the maximal present value of future cashflows, cannot be determined analytically. However, we identify the breakeven exit time that guarantees present values exceeding those of an immediate sale. While, after-taxes, an immediate sale is often optimal, long holding periods might also be attractive for investors depending on the degree of income and corporate tax integration. A classic corporate tax system often indicates holdings over more than 100 periods. By contrast, a shareholder relief system indicates the earliest breakeven exit time and thus the highest level of exit timing flexibility. Surprisingly, high retention rates are likely to accelerate sales under a classic corporate system. Additionally, the worst exit time, which should be avoided by investors, differs tremendously across tax systems. For an integrated tax system with full imputation, the worst time is reached earlier than under partial or non-integrated systems. These results could help to predict investors’ behavior regarding changes in capital gains taxation and thus are of interest for both investors and tax policymakers. Furthermore, the results emphasize the need to control for the underlying tax system in cross-country empirical studies.
... The proceeds of the "sale" would then be treated as a Auerbach (1989) One example ct a one-time tax desgned to elrrr'nate a re lorm-'nduct,d kw'ndfall gain IS the "wrndfall recapture tax" ...
... Specifi cally, this literature has sought to document the existence and the magnitude of distinct transitory and permanent tax rate components and whether the magnitude of the permanent component's elasticity is large enough to increase tax revenues (Feldstein, Slemrod, and Yitzhaki, 1980;Auten and Clotfelter, 1982;Keifer, 1990;Auerbach, 1991;Burman and Randolph, 1994;Bogart and Gentry, 1995). Though this research is not without controversy with respect to the relative magnitude of the two components, it is generally agreed that both a transitory and permanent component exist and that the elasticity of the temporary component exceeds the elasticity of the permanent component (Stiglitz, 1983;Gravelle, 1987;Auerbach, 1989). Our predictions, approach, and results are generally consistent with this line of research. ...
Using data on institutional investors' portfolio composition before and after the capital gains tax rate cut in the Taxpayer Relief Act of 1997, we find evidence that, relative to less tax sensitive institutional investors, tax sensitive institutional investors are more willing to sell appreciated equity in response to the rate cut. Further, the reduction in value invested in appreciated equity appears to be lasting, consistent with the tax rate cut lowering tax sensitive investors' impediments to optimally balancing their portfolios. These results provide direct evidence of a capital gains tax lock-in effect.
... Seastrand (1988) investigates whether taxpayers respond to changes in state tax rates as well as federal tax rates when realizing capital gains. Auerbach (1989) (1991) discusses the distortions associated with capital gains taxes, and proposes a capital gains tax system that eliminates the incentive to defer the realization of capital gains which does not require unobservable knowledge. Bradford (1996) extends this work with respect to financial instruments. ...
This paper analyzes the impact of taxation on risk-taking under irreversibility. We integrate a simple tax system into a real option model. Under irreversibility and risk neutrality, raising the tax rate can either increase or reduce risk-taking. We numerically derive tax-volatility indifference curves, i.e. combinations of volatility and tax rate, which induce identical investment thresholds. Using this novel illustration technique it is possible to identify conditions for an unambiguous influence of taxes on risk-taking. Our simulations indicate that raising the tax rate increases risk-taking under low volatility. Implementing a final withholding tax on capital income tends to reduce risky investment. Our findings extend the well-known tax effects on investment from certainty with respect to uncertainty, irreversibility, and risk-taking.
... Examples of studies using panel data on individual taxpayers include Auten and Clotfelter (1982), Slemrod and Shobe (1990), and Burman and Randolph (1994). Time series studies using aggregated data include Congressional Budget Office (1988), Auerbach (1989), and Gillingham and Greenlees (1992). 3 Zodrow (1993) provides an extensive review of the methodology and findings of the more recent literature, while the Congressional Budget Office (1988) reviews earlier studies. ...
Contrary to popular view, capital gains do not escape taxation at death as they are subject to the estate tax. The presence of the step-up in basis increases the lock-in effect of capital gains taxes as individuals are induced to hold assets until death. This effect, however, is mitigated by the estate tax which applies to assets passed to heirs. Using a sample of matched income and estate tax records in a period that straddles significant changes in capital gains and estate tax rates, the estate tax is found to have an unlocking effect on capital gains realizations. The realization elasticity with respect to the estate tax rate is estimated at 0.36 in the basic model.
... Seastrand (1988) investigates whether taxpayers respond to changes in state tax rates as well as federal tax rates when realizing capital gains. Auerbach (1989Auerbach ( , 1991 discusses the distortions associated with capital gains taxes, and proposes a capital gains tax system that eliminates the incentive to defer the realization of capital gains which does not require unobservable knowledge. Bradford (1996) extends this work with respect to financial instruments. ...
The influence of capital gains taxes on investment decisions is a central issue of accounting and public finance research. However, the implications of capital gains taxes on investors' willingness to invest in irreversible projects with entry and exit flexibility have not yet been a focal issue. As a result, the effects of taxing capital gains on the interdependencies of investment and divestment decisions have to be identified, especially under timing flexibility. This paper closes this gap by simultaneously analyzing investment timing and abandonment decisions for risky irreversible investment projects with uncertain cash flows under differential tax rates for ordinary income and capital gains. We investigate whether capital gains taxes affect immediate and delayed investment asymmetrically. Furthermore, we investigate the impact of capital gains taxation on the optimal abandonment decision. Performing extensive numerical simulations we find that varying the liquidation proceeds affects the decision whether or not to postpone the investment decision. Higher cash flow volatility favors delayed investment. We find that the introduction of capital gains taxation tends to be harmful for immediate investment. Moreover, we show that taxing capital gains may induce a tax paradox for delayed investment. Depending on the pre-tax parameter setting the future value of delayed investment may even increase in absolute terms for increasing capital gains tax rates. For sufficiently high liquidation proceeds capital gains taxation tends to favor continuation of a project. We find taxing capital gains mainly induces other, but not necessarily less arbitrary distortions than exempting capital gains. --
... Since their compensation is likely to involve a larger share of capital gains 39 Some supporters backed President Bush's proposal to reduce the maximum rate of tax on long-term gains on the rationale that the tax cut would ultimately increase total revenues. Auerbach (1989) presents an interesting discussion on the debates generated by the proposal, and the improbability of the "increasing-revenues" scenario. at a start-up firm than at a larger, more established firm, by altering the relative tax burdens on each of these shares, reductions in the capital gains tax are bound to make entrepreneurship more attractive. ...
The venture capital industry started and developed as an institutional response to rapid changes in the industrial sector and, in particular, to the emergence of small and medium-sized companies. Venture capital targets mainly small and also younger companies, primarily during their early stage, when they are developing new products and/or services. The main objective of the present paper is to provide Bank staff and policymakers in developing countries with complementary evidence on key issues in this subject. It focuses on the investment activity of the venture capital firms and the relationship between the venture capital firm and the investee firms. The paper reviews the role of government vis-a-vis the industry and concludes with some thoughts on the potential role for venture capital operations in LDC financial markets.
... Some references on the taxation of capital areAtkinson and Sandmo (1980),Chamley (1986),Jones, Manuelli and Rossi (1997),Razin and /Sadka (1989). Some special references, with respect to capital gains taxation, areAuerbach (1989),Poterba (1987Poterba ( , 1989. ...
This paper discusses capital gains taxation on movable property in Switzerland which was completely abolished at the canton level in 1996 but is now under political discussion as a tax at the confederation level. Economic reasoning on the features of the Swiss tax system and empirical results for canton data on the capital gains tax in the past suggest that such a tax has a negative effect on real income and provides a relatively low revenue. WWZ/ Universitt Basel First draft August 2000 Petersgraben 51 Revised October 2000 CH-4003 Basel Phone: ++41 61 2673344 Fax: ++41 61 267 12 36 e-mail: Peter.Kugler@unibas.ch Paper presented at "2000 Symposium on Capital Gains Taxation, September 15, Vancouver". Helpful comments from Symposium participants are gratefully acknowledged. 2 1. Introduction Capital gains taxes on the sale of movable property as shares, which were collected by most cantons in the past at the household level, were completely abolished in Switzerland in recent years...
Beim Unternehmenskauf können Verkäufer und Käufer durch Umstrukturierungsmaßnahmen steuerliche Vorteile erzielen. Dem begegnet das steuerrecht durch Missbrauchsregelungen. Diese Missbrauchsregelungen wurden im Zuge der Reform des Umwandlungssteuergesetzes geändert. Missbrauchsregelungen sind abzulehnen, wenn sie eine neutrale Besteuerung des Unternehmenskaufs verhindern oder eine insoweit bestehende Aneutralität verstärken. Dies ist für das alte Recht und das geltende Recht der Fall. Um das steueraufkommen zu sichern, werden allerdings Verstöße gegen die Neutralität der Besteuerung des Unternehmenskaufs hingenommen. Dabei ist aber der Grundsatz der Verhältnismäßigkeit zu beachten. In dieser Hinsicht ist das geltende Recht dem alten Recht überlegen.
Viele europäische Staaten haben in den letzten Jahren ihre Kapitaleinkommensbesteuerung reformiert. Einige Staaten haben in diesem Zuge eine Abgeltungssteuer auf Kapitalerträge eingeführt. Seit dem 01. Januar 2009 werden nun auch in Deutschland sämtliche Einkünfte aus Kapitalvermögen mit einem einheitlichen Abgeltungssteuersatz zur Besteuerung herangezogen. Unabhängig vom persönlichen Einkommensteuersatz ist damit die Steuer auf diese Erträge beglichen.
This chapter reviews the long-run developments in the distribution of personal income and wealth. It also discusses suggested explanations for the observed patterns. We try to answer questions such as: What do we know, and how do we know, about the distribution of income and wealth over time? Are there common trends across countries or over the path of development? How do the facts relate to proposed theories about changes in inequality? We present the main inequality trends, in some cases starting as early as in the late eighteenth century, combining previous research with recent findings in the so-called top income literature and new evidence on wealth concentration. The picture that emerges shows that inequality was historically high almost everywhere at the beginning of the twentieth century. In some countries this situation was preceded by increasing concentration, but in most cases inequality seems to have been relatively constant at a high level in the nineteenth century. Over the twentieth century inequality decreased almost everywhere for the first 80 years, largely due to decreasing wealth concentration and decreasing capital incomes in the top of the distribution. Thereafter trends became more divergent across countries and also different across income and wealth distributions. Econometric evidence over the long run suggests that top shares increase in periods of above-average growth, whereas democracy and high marginal tax rates are associated with lower top shares.
Reducing the double tax on corporate income has an ambiguous effect on marginal effective tax rates. It depends on the specifics of the policy, the extent of debt finance, whether one adopts the new or the old view of dividend taxes, the identity of the marginal investor, the importance of international capital flows, and the replacement tax regime. We illustrate or discuss each of these sources of ambiguity. We also model the excludable dividend amount (EDA), a feature of the President's dividend tax proposal, and we calculate the marginal effective tax rate for the 5/15 dividend and capital gains tax relief proposal that has become law.
Atkinson et al. (J. Econ. Lit. 49(1):3–71, 2011) survey an important new literature using income-tax-based data to measure the share of income held by top income groups. But changes in tax legislation that expand the tax base to include income sources (e.g. capital gains, dividends, etc.) disproportionately held by these groups will conflate such an expansion with an increase in the share of income they hold. We provide a cautionary tale from Australia of how comprehensive tax reform legislation in 1985 substantially altered Australian top income series, especially those that do not separate taxable realized capital gains from other taxable income. Drawing on the Household, Income and Labour Dynamics in Australia (HILDA) Survey we then estimate the size and distribution (across income groups) of taxable realized capital gains in 2006 and 2009, and compare these results with those using accrued capital gains, finding substantially different distributions. More importantly, we find substantial differences across our measures in how capital gains changed between 2006 and 2009. Our results suggest that yearly taxable realized capital gains, often included in studies of top incomes, might be a poor proxy for the theoretically more appropriate yearly accrued capital gains.
Recent research on U.S. levels and trends in income inequality varies substantially based on how these studies measure income. We crosswalk (move between standards) from a market income of tax units to a more comprehensive measure of income including realized capital gains of households using a unified data set and replicate common findings in the literature. By using a comprehensive income definition in the spirit of Haig-Simons, considering yearly accrued capital gains rather than focusing on the delayed reporting of capital gains that appear in Internal Revenue Service tax return data, the observed growth in income inequality and top income shares since 1989 is dramatically reduced.
* Abstract - This paper considers why so many questions about the economic effects of tax reforms remain unan- swered, and draws implications for how economics can be used to evaluate and design tax changes. Tax reforms have proven difficult to assess for a variety of reasons, all related to the nonexperi- mental nature of empirical economic analysis. Though this makes continued reliance on theoretical predictions necessary, evaluations should distinguish clearly between theory and evidence. The paucity of evidence also militates against the enactment of major tax reforms, for dependence on such reforms limits our ability to adapt tax policy in response to new evidence.
This paper addresses the omitted variable problem in time series studies of individual capital gains realizations. While not directly identifying the omitted variables, I use the realizations of corporate capital gains to test for common omitted variables. Jointly estimating individual and corporate realizations provides more efficient estimates than traditional single-equation models. The results provide empirical support for omitted variables being important in time series models. In both single-equation or multi-equation models controlling for omitted variables greatly reduces the estimated elasticities of individual and corporate capital gains.
Realized capital gains are typically disregarded in the study of income inequality. We show that in the case of Sweden this severely underestimates the actual increase in inequality and, in particular, top income shares during recent decades. Using micro panel data to aver-age incomes over longer periods and re-rank individuals according to income excluding capital gains, we show that capital gains indeed are a reoccurring addition to rather than a transitory component in top incomes. Doing the same for lower income groups, however, makes virtually no difference. We also try to find the roots of the recent surge in capital gains-driven inequality in Sweden since the 1980s. While there are no evident changes in terms of who earns these gains (high wage earners vs. top capital income earners), the pri-mary driver instead seems to be the drastic asset price increases on the post-1980 deregu-lated financial markets.
This paper attempts to analyze the role of taxes on property in containing asset bubbles and its consequent recessionary impact, by developing a framework, wherein the housing market is conceived as consisting of several sub-markets i.e. rental housing market, house resale market, new construction market, housing capital market and land market, with each market having an intra-market equilibrium derived by its demand and supply function, as well as several inter-market equilibria, which get readjusted after any shock with time lags and friction. The resale market is perceived as an asset market largely governed by expectations of economic agents, who are forward looking and utility maximizing. However, the expectations are not assumed to be perfectly rational, and instead are derived by heuristic decision making amidst constraint of both information and analyzing capability, are therefore subjective and can vary from time to time. In the housing resale market, the demand as well as supply is governed primarily by future expectations of returns and additional capital gains. The capital gains have a perpetuating or exponential function, indicating a positive feedback cycle and unsustainability. The analysis of two episodes of asset bubble formation and bust, in Japan, in 1980s and in United States, in recent years, with the aid of this framework shows that the asset bubble-bust can be explained using this framework, and there does not appear any inconsistencies between the theoretical framework and the empirical evidence. Both the asset bubbles show evidence of positive feedback cycles indicated by a phase of exponential growth that seems to have resulted from the positive feedback created by the self realizing expectations of market participants. In both the episodes the bubble appears to have been finally busted by the falling ‘affordability’ that was a result of rise in prices, thereby indicating an inherent unsustainability in the positive feedback dependent bubble-bust cycle, which is captured in the framework. The analysis of tax measures related with property using the framework shows that empirical evidence of the incidence of taxes and their impact is largely consistent with the results obtained with the framework, and with its use it is possible to reconcile some of the differences in views, including those between the traditional and the new-capitalist view of property taxes. The analysis of taxes allows an easy way to analyze the impact of taxes in the development of asset bubbles, and also differentiates between tax measures that are pro cyclic and those that are counter cyclic. From the analysis, it is observed that deductibility of interest and capital gains tax can have a strong role in the development of asset bubbles. Capital gains tax has a complex impact as its reduction raises the expectations of capital gains which are central to the housing price in an asset resale market, while its increase causes a lock-in, which also increases the prices, indicating that its Impact on house/land prices may differ from time to time. It is observed that tax design plays an important role, by varying the effective tax rate, often widely among the taxpayers in the same jurisdiction, and that erosion of the tax base by rising prices can make the property taxes pro cyclic and aid development of bubbles. The analysis of tax measures in the two asset bubble episodes indicates that the tax environment may have significantly contributed to the development of asset bubbles, and that more informed tax policies can have a role in preventing asset bubble development in future. More elaborate analysis of tax incidence and impact, and efforts for developing a model that allows quantitative estimation of the impact of taxes in asset bubbles are recommended for further research.
We analyze the impact of taxation on the option to defer an investment decision and derive tax rates that do not influence the extent of postponement. Furthermore, we deduce from this option pricing framework a measure of an investor's disposition towards realizing an investment project under risk aversion. We show that capital gains taxation often reduces this disposition, whereas asymmetric tax treatment of profits and losses may compensate this effect at least partially. On this basis, we identify indifferent curves that describe tax schedules providing constant disposition to invest. These curves enable a comparison of different tax rules and their impact on investment decisions without explicitly referring to the after-tax value of an investment project. Thereby, the decision-making process is simplified. Our results provide important information for asset pricing that is useful in merger and acquisition processes, especially for determining the value of a firm. We highlight overwhelming importance of integrating taxes in typically applied valuation approaches.
The lock-in effect proposes that capital gains taxes represent transaction costs that increase the reservation price for security owners and, ceteris paribus, reduce trading volume. Consistent with the lock-in effect, previous empirical research documents price and volume reactions to enacted changes in the capital gains tax rate. We investigate whether the "volume hypothesis" predicted by the lock-in effect extends to corporate acquisition activity. In particular, we analyze whether aggregate corporate acquisition activity is inversely associated with shareholder capital gains tax rates. We measure quarterly corporate acquisition activity from 1973 through 2001 using (1) the percentage of traded firms acquired in a calendar quarter and (2) the percentage of market value of traded firms acquired in a calendar quarter. In supplemental analysis, we measure acquisition activity at the industry level (i.e., as the percentage of firms and percentage of market value acquired by industry annually). In each analysis we model acquisition activity as a function of the maximum long-term capital gains tax rate for individuals and other macroeconomic factors previously hypothesized to be associated with acquisition activity. Consistent with a lock-in effect for corporate acquisitions, we find a significant negative association between corporate acquisition activity and the capital gains tax rate whether we measure acquisition activity in the aggregate or at the industry level. In addition, we find that this negative association is attributable to increased (decreased) taxable acquisition activity during periods of low (high) capital gains tax rates. These results suggest that, ceteris paribus, capital gains taxes represent significant transaction costs that influence the level of corporate acquisition activity.
Agricultural resources tend to be owned by individuals in the later stages of their economic life. If older agricultural resource
owners tend to use resources less productively than younger owners, then much of the resource base in agriculture may be inefficiently
employed. This article argues that U.S. capital taxation laws may be partly responsible for resource immobility. Capital gains
taxation tends to reduce resource mobility, as does the family business estate tax exemption. The 1997 Taxpayer Relief Act
could exacerbate the immobility problem.
Many analyses of capital gains taxation assume that realization-based taxes are economically similar to accrual-based taxes. In equilibrium, however, the distinctive implications of realization taxes for asset trading through the lock-in effect are associated with distinctive dynamic asset pricing effects. Asset prices are increased by the current realization tax, to partly offset the sale disincentive that the tax would otherwise impose. The resulting division of the tax burden between buyers and sellers of assets is similar to traditional public finance models of excise-tax incidence in product markets.
We analyze the impact of taxation on the option to defer an investment decision and derive tax rates that do not influence the extent of postponement. Furthermore, we deduce from this option pricing framework a measure of an investor's disposition towards realizing an investment project under risk aversion. We show that capital gains taxation often reduces this disposition, whereas asymmetric tax treatment of profits and losses may compensate this effect at least partially. On this basis, we identify indifferent curves that describe different tax schedules providing constant disposition to invest. These curves enable a comparison of different tax rules and their impact on investment decisions without explicitly referring to the after-tax value of an investment project. Thereby, the decisionmaking process is simplified. Applying individual utility functions we finally analyze the influence of taxation on the investor's – decision and on utility-based decisions. We highlight the overwhelming importance of integrating taxes in typically applied valuation approaches. --
A partir de un marco tributario que considera tanto los objetivos de la política tributaria de un país como sus efectos, en este trabajo se analizan los distintos impuestos que afectan al mercado de capitales en Chile. Dicho análisis, junto a una exhaustiva revisión de la literatura económica en este tema, tanto teórica como empírica, dan lugar a un conjunto de propuestas que permitirían reducir las potenciales distorsiones que introducen los impuestos en el mercado de valores en Chile actualmente, y que harían más eficiente su funcionamiento.
Elements of the tax code can affect an individuals decision to contribute to charity by altering the price of donating. The capital gains tax reduces the price of giving appreciated assets relative to giving cash, suggesting that reductions in the capital gains rate should lead to decreases in the donations of appreciated assets relative to cash, while increases in the capital gains rate should lead to increases in the donations of appreciated assets relative to cash. In this study, OLS models are applied to pooled aggregate individual income tax data from the IRS for tax years 1981-2003 to estimate the relationship between the ratio of noncash donations to cash donations and the ratio of the price of donating appreciated assets to the price of donating cash. The results indicate that only high income donors respond to changes in the capital gains tax rate by changing the composition of their charitable contributions. Since high income donors contribute more than any other income group to charities, and some charities may prefer cash donations to donations of appreciated assets, changes to the capital gains tax rate should not be made without considering the potential impact on charities. Thesis (M.A.)--Georgetown University, 2006 Includes bibliographical references. Text (Electronic thesis) in PDF format. Mode of access: World Wide Web.
Using data from the 1986 through 1997 period, we update the time series evidence on the response of capital gains realizations to tax rates.
We find higher long-run elasticities than reported in many previous studies, but the estimates decrease substantially when the influence of 1986 is effectively removed.
We explore several explanations for a diminished behavioral response in the period following fundamental tax reform, finding some suggestive evidence that the response may be dulled in part by a succession of rate changes in a relatively short period and the increasing role of mutual funds in households' portfolios.
This paper focuses on the impact of permanently extending most of the provisions in EGTRRA and JGTRRA, coupled with potential legislative changes to the AMT, on the federal deficit, the distribution of after-tax income, and economic growth. The paper shows that including moderate behavioral responses offsets 16 percent of the static revenue loss estimate from 2005 to 2014. In addition, including behavioral responses implies that the percentage change in after-tax income from permanently extending the 2001 and 2003 income tax cuts would be largest for taxpayers with incomes ranging from $20,000 to $40,000. Finally, the simulation results suggest that extending the 2001 and 2003 income tax cuts and reducing the growth rate of government spending (excluding Social Security and Medicare), assuming that government expenditures are cut to avoid dramatic increases in government consumption relative to GDP in comparison to historical norms, would increase investment, employment, and output. However, postponing the implementation of tight spending controls would more than offset the positive benefits of lower tax rates on the size of the economy and leave future generations with fewer resources for private consumption and production. Copyright Springer Science + Business Media, Inc. 2005
This paper reviews what is known about the relationship between capital gains realizations and the capital gains tax rate for given levels of economic activity, and offers a theoretical framework to guide future empirical research. With regard to the existing empirical evidence, it is concluded that realizations are probably quite responsive to the tax rate in the short run, but that very little is known about the long-run response. It is argued that the key unknown quantity determining long-run realizations is the sensitivity of basis step-up to the capital gains tax rate.
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