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Tax avoidance and asset returns: some theoretical results on the tax clientele effects

Author

Listed:
  • Liqun Liu

    (Texas A&M University)

  • Zijun Wang

    (University of Texas at San Antonio)

Abstract

Mutual funds are held by investors in both conventional taxable savings accounts and tax-deferred retirement accounts, and some investors fall in higher tax brackets than others. Recent empirical research investigates how the marginal tax rate of a mutual fund affects the fund's tax avoidance behavior and asset returns. This paper studies theoretically the tax clientele effects on the tax avoidance and performance of mutual funds. It finds that when the marginal tax rate of a mutual fund increases, the mutual fund is more prone to deferring the realization of capital gains, the before-tax return decreases, and the after-tax return also decreases.

Suggested Citation

  • Liqun Liu & Zijun Wang, 2020. "Tax avoidance and asset returns: some theoretical results on the tax clientele effects," Economics Bulletin, AccessEcon, vol. 40(1), pages 41-49.
    • Handle: RePEc:ebl:ecbull:eb-19-00932
    as

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    References listed on IDEAS

    as
    1. Shoven, John B. & Sialm, Clemens, 2004. "Asset location in tax-deferred and conventional savings accounts," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 23-38, January.
    2. Dickson, Joel M. & Shoven, John B. & Sialm, Clemens, 2000. "Tax Externalities of Equity Mutual Funds," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(3), pages 607-628, September.
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    5. Gibson, Scott & Safieddine, Assem & Titman, Sheridan, 2000. "Tax-Motivated Trading and Price Pressure: An Analysis of Mutual Fund Holdings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(3), pages 369-386, September.
    6. Clemens Sialm & Laura Starks, 2012. "Mutual Fund Tax Clienteles," Journal of Finance, American Finance Association, vol. 67(4), pages 1397-1422, August.
    7. Laura Kawano, 2014. "The Dividend Clientele Hypothesis: Evidence from the 2003 Tax Act," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 114-136, February.
    8. Bergstresser, Daniel & Poterba, James, 2002. "Do after-tax returns affect mutual fund inflows?," Journal of Financial Economics, Elsevier, vol. 63(3), pages 381-414, March.
    9. Dahlquist, Magnus & Robertsson, Göran & Rydqvist, Kristian, 2014. "Direct evidence of dividend tax clienteles," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 1-12.
    10. Bergstresser, Daniel & Pontiff, Jeffrey, 2013. "Investment taxation and portfolio performance," Journal of Public Economics, Elsevier, vol. 97(C), pages 245-257.
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    More about this item

    Keywords

    mutual funds; tax clienteles; tax avoidance; before-tax return; after-tax return;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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