Capital Gains Tax Rate Research Articles

Capital gains realizations

If there are important nondeductible costs to long-term investing, then higher capital gains tax rates may encourage or discourage investors from realizing accumulated gains. This ambiguity suggests that the sizeable observed effects of capital gains taxes on realizations may partly reflect factors other than the time value of money, such as investor anticipations of future tax rate changes.

CEOs’ capital gains tax liabilities and accounting conservatism

AbstractRecent studies show that the tax‐induced lock‐in effect discourages CEOs from unwinding their unrestricted equity and subsequently exacerbates their risk‐aversion. I investigate how CEOs’ unrealized capital gains tax liabilities (tax burdens) influence financial reporting conservatism. I find that the demand for accounting conservatism decreases with CEO tax burdens. Further analyses show that the negative relation between CEO tax burden and conservatism is stronger when the firm has high leverage and high default risk and when the CEO's incentives are more aligned with equity holders. This highlights the shareholder–creditor agency conflicts mitigation role of CEO tax burdens in reducing creditors’ demand for conservatism. I exploit the Federal Taxpayer Reform Act of 1997 and staggered state‐level tax cuts that significantly decreased personal capital gains tax rates as identification strategies.

Practical Applications of The Tax Benefits of Direct Indexing: Not a One-Size-Fits-All Formula

In <ext-link><bold><italic>The Tax Benefits of Direct Indexing: Not a One-Size-Fits-All Formula</italic></bold></ext-link>, from the Summer 2022 issue of <bold><italic>The Journal of Beta Investment Strategies</italic></bold>, <bold>Nathan Sosner</bold> and <bold>Stanley Krasner</bold> (both at <bold>AQR Capital Management</bold>), and <bold>Michael Gromis</bold> (a student at <bold>Harvard Law School</bold>), explore the magnitude and sources of the tax benefit of a direct-indexing tax-loss-harvesting strategy. The authors note that capital losses realized by loss-harvesting strategies are most valuable when investors use them to offset short-term capital gains from other investments and that investors most likely to experience regular short-term capital gains are high-net-worth investors with allocations to hedge funds and derivatives. In fact, they show that only this subset of investors is situated to enjoy a long-run tax benefit from direct indexing that comes from the difference in short-term capital gains and long-term capital gains tax rates—what the authors call a <italic>character benefit</italic>. More typical investors, with mostly long-term capital gains from other investments, can only enjoy a deferral component of the tax benefit, which declines to zero as the strategy portfolio appreciates. However, the authors show that the deferral benefit is still available in the long run to those investors who make systematic contributions to their portfolios. Furthermore, the future tax liability that results from gain deferral can be reduced by combining the direct-indexing strategy with a charitable-giving program. Absent regular short-term losses or systematic contributions to the portfolio, the tax benefits of direct indexing decay and disappear after five years, on average. Given these nuances, it is important that advisors deepen their understanding of the tax-loss-harvesting strategies as platforms for implementing the strategies become more popular and widespread.

FINANCIAL MARKET FRICTIONS AND TRADE IN THE NIGERIAN BOURSE

Using data from 1982 to 2021, this study looked at how financial market frictions affected trade on the Nigerian bourse. For the study, a longitudinal research approach was chosen. The study’s specified model was estimated using the Error Correction Mechanism (ECM) and multivariate ordinary least square (OLS) techniques. Findings revealed that only the capital gains tax rate hindered trading activities in the Nigerian stock market in the long run during the period studied. However, in the short run, transaction costs, capital gain tax rates, and dividend tax rates all have a negative impact on trading activity on the Nigerian stock exchange, but they fail the significant test. As a result, the study concludes that the capital gains tax rate is the only financial market friction that impedes trade on the Nigerian stock exchange during the study period. To mitigate the negative impact on trading activity on the Nigerian bourse, the government should ensure that capital gains are taxed at a reasonable rate. Accordingly, the present capital gains tax rate of 10% should be cut to 5%.

Mutual funds' capital gains lock-in and earnings management

Capital gains taxation creates a lock-in effect, increasing investors' incentives to monitor and decreasing portfolio firms' incentives to cater to short-term investors. We show a negative relation between lock-in and portfolio firms' earnings management, and this relation is stronger for capital gains held by tax-sensitive investors. Further, the relation between lock-in and earnings management is stronger when the capital gains tax rate is higher. We show that locked-in funds vote against management and against audit committee members' reappointment following earnings management. Locked-in funds are less likely to exit a position following disappointing earnings announcements, reducing firms' incentive to manage earnings.

양도소득세제의 문제점이 조세행정의 효율성에 미치는 영향에 관한 연구

This study conducted a survey on the general public and real estate professionals to analyze the effects of the problems of the capital gains tax system on the efficiency of tax administration. The results of the analysis are as follows. First, it was found that <Hypothesis 1> that the problems of the capital gains tax system would increase administrative costs related to taxation was supported. All four items presented as problems with the capital gains tax system were analyzed to have a significant impact on the increase in tax-related administrative costs. Second, <Hypothesis 2> that the problems of the capital gains tax system would increase tax evasion or portals appeared different for each item. The complexity of non-taxation or exemption regulations and frequent changes and complexity of the capital gains tax rate resulted in statistically significant results, but the difficulty in understanding the special deduction for long-term holdings and the complexity of the calculation process of the capital gains tax rate were statistically insignificant. This is judged to be a result of reflecting people's perception that tax evasion or portal is not only ethically problematic, but that the difficulty of simple understanding and the complexity of the calculation process is too difficult to directly affect tax avoidance or portal. Lastly, the increase in tax-related administrative costs and the increase in tax evasion or portals suggested as factors that reduce the efficiency of tax administration were analyzed to decrease the efficiency of tax administration. A limitation of this study is that only capital gains tax among real estate-related taxes is targeted. In the future, it is necessary to examine the problems covering all real estate taxes and to improve the tax system in relation to other taxes.

Capital Gains Taxes and Real Corporate Investment: Evidence from Korea

This paper assesses the effects of capital gains taxes on investment in the Republic of Korea (hereafter, Korea), where capital gains tax rates vary at the firm level by firm size. Following a reform in 2014, firms with a tax cut increased investment by 34 log points and issued more equity by 9 cents per dollar of lagged revenue, relative to unaffected firms. Additionally, the effects were larger for firms that appeared more cash constrained or went public after the reform. Taken together, these findings are consistent with the “traditional view” predicting that lower payout taxes spur equity-financed investment by increasing marginal returns on investment. (JEL D25, G31, G32, H25, H32, L25)

An Evaluation of the System of Taxing Capital Gains from Shares in Cameroon in Light of Double Taxation of Corporate Profits

The quest for additional revenue yield has led to fundamental changes in the Cameroonian tax system, specifically in the method of taxing capital gains on transfer of shares. Though aimed at improving the system from an equitable angle, these changes may give rise to theoretical controversy given the method of taxing these gains. In particular, the trigger of the capital gains tax (CGT) and the method of taxing corporate profits are potential elements to be raised against the recent increase of CGT rate on shares and the deletion of the incentives initially granted. This paper argues the inappropriateness of these changes through an evaluation of its rationale. Notwithstanding the primacy of the equity criterion, the theoretical basis for taxing these gains may however dictate departure from such principle in order to achieve the objective of increasing the revenue yield.

The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates

This paper uses a direct-projections approach to estimate the effect of capital gains taxation on realizations at the state level and then develops a framework for determining revenue-maximizing rates at the federal level. We find that the elasticity of revenues with respect to the tax rate over a 10-year period is −0.5 to −0.3, indicating that capital gains tax cuts do not pay for themselves and that a 5 percentage point rate increase would yield $18 to $30 billion in annual federal tax revenue. Our long-run estimates yield revenue-maximizing capital gains tax rates of 38 to 47 percent. (JEL E62, H25, H71)

Long‐term capital gains taxes and stock prices: Evidence from India

AbstractPrior studies of the relevance of long‐term capital gains for stock prices rely on the evidence from the 1997 tax cut in the United States. The key component of the tax‐sensitive ownership in these studies is individual ownership; its average is reported to be as high as 66.7%. The sharp increase in institutional ownership over the last two decades to more than 80% and the concomitant decline in individual ownership raises the question of whether taxes on long‐term capital gains are still relevant for stock prices. We examine stock price responses to the 2018 increase in the long‐term capital gains tax rate in India, a market where individual stock ownership is only 18.5%. Overall, the evidence provides strong support for the continued relevance of long‐term capital gains taxes for stock prices despite individual investors accounting for only a small portion of the stock ownership.

UNDER INVOICING IN THE RESIDENTIAL REAL ESTATE MARKET IN PAKISTAN

In this paper the meaning of “under invoicing in a real estate market” signifies that the market value of real property exceeds its record value appearing in government documentation. The purpose of this study is to identify the level of under invoicing and determine the factors that affect the under invoicing in real estate markets in Pakistan. We apply OLS and Extreme Bounds Analysis techniques to test our propositions. The statistical sample consists of 338 real estate contracts. We find that under invoicing is determined by a multiplicity of factor. These include: the capital gains tax rate, the measurable amount of corruption in the economy, the risk-free rate, a buyer’s profession, the reputation of the local housing authority, and the degree of disequilibria in regional real estate markets. Our findings are consistent with four distinct hypotheses: (a) tax evasion hypothesis, (b) widening gap hypothesis, (c) a corruption hypothesis and (d) a signaling hypothesis. The evidence suggests that higher rates of taxation and a larger statistical incidence of corruption in markets tend to be associated with a greater probability of under-invoicing. The findings of the study have practical implications for those investors who are interested in real estate markets of emerging and developing economies.

Summaries of Articles

Summaries of Articles

Contextualizing Elasticities for Policymaking: Capital Gains and Revenue-Maximizing Tax Rates

Capital gains revenue estimates rely on a long history of research empirically estimating the tax elasticity of capital gains realizations. These elasticity estimates have varied from zero to well over 3 in absolute value depending on numerous factors, such as the time frame studied, the type of capital asset, and the estimation strategy employed. Often, the headline elasticity from a study of this nature is used to calculate the implied revenue-maximizing capital gains tax rate. Unfortunately, this last, policy-relevant step has received insufficient scrutiny. The standard approach fails to sufficiently acknowledge that the estimates of the revenue-maximizing rate are a product of the estimation procedure used and the context of the tax system from which the data were generated. Such an approach yields a single capital gains tax rate which applies to all realized gains and mechanically overstates the resulting revenue-maximizing rate.

Policy Forum: The Taxation of Capital Gains—Principles, Practice, and Directions for Reform

The taxation of capital gains is particularly complex given their relatively infrequent receipt, the different ways in which they are generated, and worries about harming productivity. There are theoretical arguments in support of policies ranging from zero rates to high rates of tax on capital. In this article, the author first discusses the impact of capital gains on inequality, which often motivates discussions about how gains should be taxed. He then sets out the principles that determine how gains should be taxed—in particular, how the tax rate should relate to tax rates on labour income. The author proposes that capital gains tax rates should be equalized with income tax rates, subject to provisions to allow gains to be "smoothed" over time and to remove inflation from the tax base. He highlights key transitional issues in moving to such a tax structure. Finally, he discusses specific lessons for Canada.

To Realize, or Not to Realize? Capital Gains Tax and Portfolio Choice

The central question addressed in this note is whether it is better to sell (and re-purchase) appreciated assets now and pay today's long-term capital gains tax rate, or wait to realize gains in the future and pay a likely higher capital gains tax rate. The authors argue that a framework based on maximizing expected risk-adjusted wealth should be the preferred method for answering some of the important questions arising from the interaction of taxes and investing. Investment theory holds that in a world of efficient markets, random walks and no taxes, horizon shouldn't materially affect many types of investment decisions. However, as soon as tax enters the picture, horizon in many situations becomes the single most important input an investor needs to think about. For investors with long horizons and moderate-size unrealized capital gains, it will usually make sense to defer realization even if the investor expects the tax rate to jump by 20 percentage points. Surprisingly, at intermediate time horizons, the optimal decision can be to realize some, but not all, of the unrealized gains. Investment horizon isn't the only critical input, and the interaction of all the relevant variables puts the development of a generic rule-of-thumb out of reach.

Personal taxation and individual stock ownership

ABSTRACT Under a differential taxation system, portfolio allocation decisions are based not only on the risk-return relationship of assets but also on their tax characteristics. The higher the tax burden on equity securities, the lower the share of stock investment in a tax-optimal portfolio. I use a multitude of changes in personal tax rates to assess the impact of personal taxes on individual stock ownership among a sample of 9,055 listed European firms. I observe lower levels of individual stock ownership, if relative personal taxes on stock ownership are higher than personal taxes on bonds. Cross-sectional evidence further reveals that the relation between personal taxation and individual stock ownership is significantly moderated by firm-specific risk. I additionally provide single country evidence of a tax clientele effect. Following an increase in the personal capital gains tax rate in Austria, I find individual owners to rebalance stock ownership to maximize after-tax returns in light of the new tax rules.

Investment income taxes and private equity acquisition activity

Abstract Utilizing a novel identification strategy, we uncover evidence that reducing the investment income tax rate increases acquisition activity by private equity acquirers. Applying a difference-in-difference methodology, we find that acquisitions sponsored by private equity firms nearly doubled following the investment income tax rate reductions associated with the Taxpayer Relief Act of 1997 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. We attribute our findings to private equity fund structures and managing partners’ ability to capture the expected benefit of lower capital gains tax rates. These findings are robust to controlling for target shareholders’ tax incentives, as well as firm, industry, and macroeconomic factors possibly influencing acquisition activity.

An Empirical Evaluation of Tax-Loss-Harvesting Alpha

Advances in financial technology have made tax-loss harvesting more feasible for retail investors than such strategies were in the past. We evaluated the magnitude of this “tax alpha” with the use of historical data from the CRSP monthly database for the 500 securities with the largest market capitalizations from 1926 to 2018. Given long-term and short-term capital gains tax rates of 15% and 35%, respectively, we found that a tax-loss-harvesting strategy yielded a before-transaction-cost tax alpha of 1.08% per year for our sample period. When the strategy was constrained by the “wash sale rule,” the tax alpha decreased from 1.08% per year to 0.82% per year.

An Empirical Evaluation of Tax-Loss Harvesting Alpha

Advances in financial technology have made tax-loss harvesting strategies more feasible for retail investors. We evaluate the magnitude of this “tax alpha” using historical data from the Center for Research in Securities Prices monthly database for the 500 securities with the largest market capitalization from 1926 to 2018. Given long- and short-term capital gains tax rates of 15% and 35%, respectively we find that a tax-loss harvesting strategy yields a tax alpha of 1.10% per year from 1926 to 2018. When constrained by the wash sale rule, the tax alpha decreases from 1.10% per year to 0.85% per year.

Taxing away M&amp;A: Capital gains taxation and acquisition activity

Abstract Capital gains taxation distorts the market for corporate control by imposing a cost on selling shareholders in acquisitions. This lock-in effect increases premiums required for deal completion preventing some M&As from taking place at all. We estimate the effect of capital gains taxation on the quantity of realized M&A deals and compute the deadweight loss related to taxing these transactions. We find that a one percentage point increase in the capital gains tax rate reduces acquisition activity by around 1% annually. For the United States, this implies unrealized synergy gains of $9.3 billion each year due to capital gains taxes.