Abstract
The tax rate on capital gains of equity securities has varied substantially over time and correlates negatively with realized capital gains and collected taxes. Our model shows that investors who anticipate the dynamics of the capital gains tax rate in their bond-equity mix, realize more gains the higher the realized return on equity, the lower the capital gain tax rate, and the higher the capital loss carried over. We simulate the behavior of a calibrated population of investors at an annual frequency, and find results consistent with data on aggregate capital gains taxes paid. Policymakers can use our model to guide changes in the capital gains tax rate.
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