Stock Transactions Volume and the 1978 Capital Gains Tax Reduction

The purpose of the research reported here was to see whether the accumu-lated evidence since 1979 is consistent with the hypothesis that the capital gains tax cuts in the Revenue Act of 1978 caused an increased volume of stock transactions. Transactions volume on the New York Stock Exchange, American Stock Exchange, and over-the-counter markets has risen substantially since the beginning of 1979. Average daily volumefor the first five months of 1981 on all markets was more than three times higher than it was from 1972 through 1977. A substantial amount of this increased volume can be associated with the capital gains tax cut. It is difficult to disentangle any possible effect of the stock price level on volume from the effect of the tax reduction. When both factors are introduced as explanatory variables, the association between the tax cut and increased transactions volume remains strongfor the New York Stock Exchange, but is not supported for the American Stock Exchange. For over-the-counter transactions, the evidence is consistent with a gradually increasing volume of transactions associated with the tax reduction, but not a constant increase.