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The Impact of the Capital Gains Exemption on Capital Markets

Author

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  • Kenneth J. McKenzie
  • Aileen J. Thompson

Abstract

Using event study methodology, we test the hypothesis that the 1985 capital gains exemption decreased the marginal effective tax rate on capital gains using two samples of stock market prices that control for industry and firm level effects of other aspects of the budget. We derive estimates of the impact of the exemption on the effective capital gains tax rate, and on the user cost of capital. Using existing estimates of the relationship between the user cost of capital and investment, we find that, depending upon the sample, the exemption may have increased real investment by as much as six per cent, or had no impact at all.

Suggested Citation

  • Kenneth J. McKenzie & Aileen J. Thompson, 1995. "The Impact of the Capital Gains Exemption on Capital Markets," Canadian Public Policy, University of Toronto Press, vol. 21(s1), pages 100-115, November.
    • Handle: RePEc:cpp:issued:v:21:y:1995:i:s1:p:100-115
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    Cited by:

    1. Jeetendra Dangol, 2008. "Unanticipated Political Events and Stock Returns: An Event Study," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 20, pages 86-110, April.
    2. Landon, Stuart & Smith, Constance, 2008. "Taxation and bond market investment strategies: Evidence from the market for Government of Canada bonds," MPRA Paper 9959, University Library of Munich, Germany.
    3. James B. Davies, 1995. "Distributional Effects of the Lifetime Capital Gains Exemption: Single vs. Multi-Year Analysis," Canadian Public Policy, University of Toronto Press, vol. 21(s1), pages 159-173, November.
    4. Akinloye Akindayomi & Hussein A. Warsame, 2007. "Effects of Capital Gains Taxation Changes on Stock Prices: Evidence from the February 2000 Canadian Budget/RÉPERCUSSIONS SUR LE COURS DES TITRES DES MODIFICATIONS APPORTÉES À L'IMPÔT SUR LES GAINS EN ," Accounting Perspectives, John Wiley & Sons, vol. 6(4), pages 369-387, November.
    5. Tao Zeng, 2009. "Stock Price Reactions to the Canadian Lifetime Capital Gains Exemption," Accounting & Taxation, The Institute for Business and Finance Research, vol. 1(1), pages 75-85.
    6. Claudio Agostini & Mariel C. Siravegna, 2009. "Efectos de la Exención Tributaria a las Ganancias de Capital en el Precio de las Acciones en Chile," ILADES-UAH Working Papers inv233, Universidad Alberto Hurtado/School of Economics and Business.

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