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The Impact of the Capital Gains Exemption on Capital Markets


  • Kenneth J. McKenzie
  • Aileen J. Thompson


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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    References listed on IDEAS

    1. Auerbach, Alan J, 1991. "Retrospective Capital Gains Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 167-178, March.
    2. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. John Helliwell, 1969. "The Taxation of Capital Gains," Canadian Journal of Economics, Canadian Economics Association, vol. 2(2), pages 314-318, May.
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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. 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-Georgetown University Working Papers inv233, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.

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