Abstract
I provide evidence that changes in shareholder-level taxes influence investment returns even when income from the investment is not subject by statute to the rate that is changed. Using an equilibrium model of after-tax investment returns I predict the yields of Treasury bills, which are subject only to ordinary tax rates, will have an inverse reaction to changes in the capital gains tax rate as the income on them becomes increasingly tax-disadvantaged when compared to other investments. In a sample comprised of short-term Treasury bills, yields appear to increase in response to the May 7, 1997 surprise reduction in capital gains tax rates. The increase is statistically significant and is robust to other macroeconomic and institutional determinants of Treasury bills.
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