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Tax Planning By Mutual Funds: Evidence From Changes In The Capital Gains Tax Rate

  • Chen, Feng
  • Kraft, Arthur
  • Weiss, Ira
Registered author(s):

    We investigate whether mutual funds engage in tax planning by testing how they respond to changes in the capital gains tax rates. While previous evidence suggests that individual investors time capital gains realizations, mutual fund managers may not tax plan like individuals because fund managers have incentives to consider the tax liability of both current and potential investors. Our analysis spans over 44 years and six major tax changes, allowing us to examine the effects of both tax rate increases and decreases. Overall, we find evidence consistent with tax planning by managers of both open-end and closed-end mutual funds.

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    Article provided by National Tax Association in its journal National Tax Journal.

    Volume (Year): 64 (2011)
    Issue (Month): 1 (March)
    Pages: 105-34

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    Handle: RePEc:ntj:journl:v:64:y:2011:i:1:p:105-34
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    1. Seyhun, H Nejat & Skinner, Douglas J, 1994. "How Do Taxes Affect Investors' Stock Market Realizations? Evidence from Tax-Return Panel Data," The Journal of Business, University of Chicago Press, vol. 67(2), pages 231-62, April.
    2. Jennifer L. Blouin & Jana Smith Raedy & Douglas A. Shackelford, 2003. "Capital Gains Taxes and Equity Trading: Empirical Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 41(4), pages 611-651, 09.
    3. Himmelberg, Charles P. & Hubbard, R. Glenn & Palia, Darius, 1999. "Understanding the determinants of managerial ownership and the link between ownership and performance," Journal of Financial Economics, Elsevier, vol. 53(3), pages 353-384, September.
    4. Matthew Eichner & Todd Sinai, . "Capital Gains Tax Realizations and Tax Rates: New Evidence From Times Series," Zell/Lurie Center Working Papers 334, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
    5. Barclay, Michael J. & Pearson, Neil D. & Weisbach, Michael S., 1998. "Open-end mutual funds and capital-gains taxes," Journal of Financial Economics, Elsevier, vol. 49(1), pages 3-43, July.
    6. William Rogers, 1993. "Quantile regression standard errors," Stata Technical Bulletin, StataCorp LP, vol. 2(9).
    7. Li Jin, 2006. "Capital Gains Tax Overhang and Price Pressure," Journal of Finance, American Finance Association, vol. 61(3), pages 1399-1431, 06.
    8. Gillingham, Robert & Greenlees, John S., 1992. "The Effect of Marginal Tax Rates on Capital Gains Revenue: Another Look at the Evidence," National Tax Journal, National Tax Association, vol. 45(2), pages 167-77, June.
    9. 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(03), pages 369-386, September.
    10. Plancich, Stephanie, 2003. "Mutual Fund Capital Gain Distributions and the Tax Reform Act of 1997," National Tax Journal, National Tax Association, vol. 56(1), pages 271-96, March.
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