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Capital Gains Taxation and Investment Dynamics


  • Sungki Hong
  • Terry S. Moon


This paper quantifies the long-run effects of reducing capital gains taxes on aggregate investment. We develop a dynamic general equilibrium model with heterogeneous firms, which face discrete capital gains tax rates based on firm size. We calibrate our model by targeting micro moments and a difference-in-differences estimate of the capital stock response based on the institutional setting and policy reform in Korea. We find that the reform that reduced the capital gains tax rates for a subset of firms substantially increased investment in the short run, and capturing general equilibrium price responses is important to quantify the long-run aggregate outcomes.

Suggested Citation

  • Sungki Hong & Terry S. Moon, 2018. "Capital Gains Taxation and Investment Dynamics," Working Papers 2018-31, Federal Reserve Bank of St. Louis, revised 12 Dec 2019.
  • Handle: RePEc:fip:fedlwp:2018-031
    DOI: 10.20955/wp.2018.031
    Note: On July 29, 2020, this paper was redacted from the Federal Reserve Bank of St. Louis Working Paper Series.

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    References listed on IDEAS

    1. François Gourio & Nicolas Roys, 2014. "Size‐dependent regulations, firm size distribution, and reallocation," Quantitative Economics, Econometric Society, vol. 5, pages 377-416, July.
    2. Eric Zwick & James Mahon, 2017. "Tax Policy and Heterogeneous Investment Behavior," American Economic Review, American Economic Association, vol. 107(1), pages 217-248, January.
    3. Christopher L. House & Matthew D. Shapiro, 2008. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation," American Economic Review, American Economic Association, vol. 98(3), pages 737-768, June.
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    More about this item


    Business Taxes and Subsidies; Capital; Saving and Capital Investment; Fiscal Policy; Investment Decisions;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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