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Capital Gains Realizations of the Rich and Sophisticated

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  • Alan J. Auerbach
  • Jonathan M. Siegel

Abstract

This paper attempts to bring theoretical and empirical research on capital gains realization behavior closer together by considering whether investors who appear to engage more in strategic tax avoidance activity also respond differently to tax rates. We find that such investors exhibit significantly smaller responses to permanent tax rate changes than other investors. Put another way, a larger part of their response to capital gains tax rates reflects timing, consistent with their closer adherence to tax avoidance strategies emphasizing arbitrage based on tax rate differentials. This finding holds for two alternative specifications of realization behavior, one of which suggests larger permanent responses to capital gains tax rates than those of previous panel studies.

Suggested Citation

  • Alan J. Auerbach & Jonathan M. Siegel, 2000. "Capital Gains Realizations of the Rich and Sophisticated," NBER Working Papers 7532, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:7532
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    References listed on IDEAS

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    1. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492, National Bureau of Economic Research, Inc.
    2. Burman, Leonard E & Randolph, William C, 1994. "Measuring Permanent Responses to Capital-Gains Tax Changes in Panel Data," American Economic Review, American Economic Association, vol. 84(4), pages 794-809, September.
    3. Lee, Lung-fei & Maddala, G S & Trost, R P, 1980. "Asymptotic Covariance Matrices of Two-Stage Probit and Two-Stage Tobit Methods for Simultaneous Equations Models with Selectivity," Econometrica, Econometric Society, vol. 48(2), pages 491-503, March.
    4. Alan J. Auerbach & Leonard E. Burman & Jonathan Siegel, 1998. "Capital Gains Taxation and Tax Avoidance: New Evidence from Panel Data," NBER Working Papers 6399, National Bureau of Economic Research, Inc.
    5. Alan J. Auerbach, 1988. "Capital Gains Taxation in the United States: Realizations, Revenue, and Rhetoric," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 595-638.
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    Citations

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    Cited by:

    1. Marcelo Medeiros, 2006. "The Rich and the Poor: The Construction of an Affluence Line from the Poverty Line," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 78(1), pages 1-18, August.
    2. Stefanie Stantcheva, 2020. "Dynamic Taxation," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 801-831, August.
    3. Blundell, Richard & Francesconi, Marco & van der Klaauw, Wilbert, 2011. "Anatomy of Welfare Reform Evaluation: Announcement and Implementation Effects," IZA Discussion Papers 6050, Institute of Labor Economics (IZA).
    4. Sven-Olov Daunfeldt & Ulrika Praski-Ståhlgren & Niklas Rudholm, 2010. "Do high taxes lock-in capital gains? Evidence from a dual income tax system," Public Choice, Springer, vol. 145(1), pages 25-38, October.
    5. Gallmeyer, Michael F. & Kaniel, Ron & Tompaidis, Stathis, 2006. "Tax management strategies with multiple risky assets," Journal of Financial Economics, Elsevier, vol. 80(2), pages 243-291, May.
    6. BILOA ESSIMI, Jean Aristide & CHAMENI NEMBUA, Celestin, 2013. "Estimation D’Une Ligne D’Affluence : Cas Du Cameroun [Affluence Line Estimation: Case Of Cameroon]," MPRA Paper 48095, University Library of Munich, Germany.
    7. Lavecchia, Adam M. & Tazhitdinova, Alisa, 2021. "Permanent and Transitory Responses to Capital Gains Taxes: Evidence from a Lifetime Exemption in Canada," IZA Discussion Papers 14331, Institute of Labor Economics (IZA).
    8. John Diamond, 2005. "Dynamic Effects of Extending the 2001 and 2003 Income Tax Cuts," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(2), pages 165-192, March.
    9. Ole Agersnap & Owen Zidar, 2021. "The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates," American Economic Review: Insights, American Economic Association, vol. 3(4), pages 399-416, December.
    10. Yu, Zhenning & She, Shuoqi & Xia, Chuyu & Luo, Jiaojiao, 2023. "How to solve the dilemma of China’s land fallow policy: Application of voluntary bidding mode in the Yangtze River Delta of China," Land Use Policy, Elsevier, vol. 125(C).
    11. Francesco Menoncin & Paolo M. Panteghini, 2013. "The Johansson-Samuelson Theorem in General Equilibrium: A Rebuttal," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(1), pages 57-71, March.
    12. Poterba, James M., 2002. "Taxation, risk-taking, and household portfolio behavior," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 17, pages 1109-1171, Elsevier.
    13. Advani, Arun, 2021. "The taxation of capital gains: principles, practice, and directions for reform," CAGE Online Working Paper Series 589, Competitive Advantage in the Global Economy (CAGE).
    14. Chris Mitchell, 2019. "The Lock-In Effect and the Corporate Payout Puzzle," ISER Discussion Paper 1070r, Institute of Social and Economic Research, Osaka University, revised Aug 2021.
    15. Simon Bösenberg & Peter Egger & Benedikt Zoller-Rydzek, 2018. "Capital taxation, investment, growth, and welfare," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(2), pages 325-376, April.
    16. Bradley, Sebastien, 2018. "Assessment limits and timing of real estate transactions," Regional Science and Urban Economics, Elsevier, vol. 70(C), pages 360-372.
    17. Chris Mitchell, 2019. "The Lock-In Effect and the Corporate Payout Puzzle," ISER Discussion Paper 1070, Institute of Social and Economic Research, Osaka University.
    18. Martin Gritsch & Tricia Coxwell Snyder, 2007. "Taxing Options: Do Ceos Respond To Favorable Tax Treatment Of Stock Options?," Eastern Economic Journal, Eastern Economic Association, vol. 33(3), pages 343-357, Summer.
    19. Owen Zidar, 2019. "Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment," Journal of Political Economy, University of Chicago Press, vol. 127(3), pages 1437-1472.

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    More about this item

    JEL classification:

    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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