The effect of capital gains tax policy on investment company capital gains realizations

Abstract

Investment companies dominate U.S. equity markets, both in terms of the large proportion of equity capital they control and the sizable trading volume they generate. This shift in the ownership of U.S. equity securities could lessen the impact of changes in U.S. capital gains tax policy which are aimed at individual investors. This paper examines the effect of capital gains tax rates on investment company capital gains realizations. Empirical tests on cross-sectional, time-series data provide evidence of an unlocking effect of lower marginal capital gains tax rates. Investment companies exhibit economic response behavior consistent with the lock-in effect characteristic of individual investors. Capital gains realized are higher during periods of low marginal capital gains tax rates. The significant permanent tax effects estimated in the analysis are strengthened when transitory effects are introduced into the model.

Citation

Nash, C.Y., Wilder, W.M. and Stocks, M.H. (2002), "The effect of capital gains tax policy on investment company capital gains realizations", Advances in Taxation (Advances in Taxation, Vol. 14), Emerald Group Publishing Limited, Leeds, pp. 245-270. https://doi.org/10.1016/S1058-7497(02)14013-0