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Tax Regimes and Capital Gains Realizations

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  • Martin Jacob

Abstract

This paper contrasts the individual capital gains realization behavior between progressive and proportional tax regimes. Using a longitudinal panel of over 288,000 individuals in Sweden, I exploit the 1991 tax reform in Sweden that changed progressive capital gains tax rates ranging from 12% to 80% to a proportional tax rate of 30%. Using the proportional tax system to control for non-tax reasons to realize capital gains, I show that individuals are highly responsive to capital gains tax incentives created by temporary income changes under a progressive capital gains tax. More specifically, I find that individuals with temporary negative (positive) income changes sell (hold) shares that they would hold (sell) in the absence of temporary tax incentives. Further, I show that high-income individuals are more tax sensitive than low-income individuals. This result indicates that low-income individuals facing temporary negative income changes could trade predominantly for non-tax reasons.

Suggested Citation

  • Martin Jacob, 2018. "Tax Regimes and Capital Gains Realizations," European Accounting Review, Taylor & Francis Journals, vol. 27(1), pages 1-21, January.
    • Handle: RePEc:taf:euract:v:27:y:2018:i:1:p:1-21
    DOI: 10.1080/09638180.2016.1203811
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    13. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
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    Cited by:

    1. David Eberhardt & Nils Linnemann & Martin Thomsen, 2019. "Die Einführung von § 8b Abs. 4 KStG – Eine ökonomische Analyse potentieller Ausweichreaktionen [The Introduction of Sec. 8b (4) Corporate Income Tax Act—An Economic Analysis of Potential Avoidance ," Schmalenbach Journal of Business Research, Springer, vol. 71(3), pages 271-311, November.
    2. He, Eric & Jacob, Martin & Vashishtha, Rahul & Venkatachalam, Mohan, 2022. "Does differential taxation of short-term relative to long-term capital gains affect long-term investment?," Journal of Accounting and Economics, Elsevier, vol. 74(1).
    3. Buhlmann, Florian & Doerrenberg, Philipp & Voget, Johannes & Loos, Benjamin, 2020. "How do taxes affect the trading behavior of private investors? Evidence from individual portfolio data," ZEW Discussion Papers 20-047, ZEW - Leibniz Centre for European Economic Research.
    4. Dieci, Roberto & Gardini, Laura & Westerhoff, Frank, 2022. "On the destabilizing nature of capital gains taxes," International Review of Financial Analysis, Elsevier, vol. 83(C).

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