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Capital Gains Taxes and Asset Prices: Capitalization or Lock‐in?
Author(s) -
DAI ZHONGLAN,
MAYDEW EDWARD,
SHACKELFORD DOUGLAS A.,
ZHANG HAROLD H.
Publication year - 2008
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2008.01329.x
Subject(s) - capital gains tax , economics , monetary economics , capitalization , taxpayer , capital (architecture) , tax rate , cost of capital , stock (firearms) , labour economics , microeconomics , finance , double taxation , macroeconomics , ad valorem tax , profit (economics) , history , mechanical engineering , linguistics , philosophy , archaeology , engineering
This paper demonstrates that the equilibrium impact of capital gains taxes reflects both the capitalization effect (i.e., capital gains taxes decrease demand) and the lock‐in effect (i.e., capital gains taxes decrease supply). Depending on time periods and stock characteristics, either effect may dominate. Using the Taxpayer Relief Act of 1997 as our event, we find evidence supporting a dominant capitalization effect in the week following news that sharply increased the probability of a reduction in the capital gains tax rate and a dominant lock‐in effect in the week after the rate reduction became effective.