How Do Taxes Affect the Trading Behavior of Private Investors? Evidence From Individual Portfolio Data

Abstract

We exploit a large reform of capital-gains taxation in Germany combined with portfolio-level daily panel data to study the causal effect of taxes on individual stock-trading behavior and the disposition effect. We find substantial spikes in selling probabilities around an intertemporal tax discontinuity, and no such spikes after the abolishment of the discontinuity. Using difference-in-bunching methods, nonparametric regressions and effective tax rates, we quantify the tax effect and identify interesting patterns of heterogeneity. We further find evidence that the wellestablished disposition effect is strongly affected by the tax discontinuity through tax motivated selling of both gains and losses.

Permanent and Transitory Responses to Capital Gains Taxes: Evidence from a Lifetime Exemption in Canada

“…For a recent summary of the literature, seeStantcheva (2020). Also, a growing literature estimates the effects of capital gains taxes on investors' trading behavior and portfolio asset allocations(Alan et al (2010);Buhlmann et al (2020)). …”

Permanent and Transitory Responses to Capital Gains Taxes: Evidence from a Lifetime Exemption in Canada

“…Our results contribute to several active literatures in public finance. A number of papers study individual responses to capital gains taxes (Feldstein et al (1980); Minarik (1981); Auten and Clotfelter (1982); Lindsey (1987); Poterba (1987); Auerbach and Poterba (1988); Auten et al (1989); Slemrod and Shobe (1990); Gillingham and Greenless (1992); Burman and Randolph (1994); Bogart and Gentry (1995); Auerbach and Siegel (2000), Landsman et al (2002); Dowd et al (2015); Bakija and Gentry (2014); Dowd and McClelland (2019); Buhlmann et al (2020); Agersnap and Zidar (2020)). 7 Compared with prior work, our setting allows for an arguably cleaner identification of both short-run and long-run responses to capital gains taxes.…”

“…For a recent summary of the literature, seeStantcheva (2020). Also, a growing literature estimates the effects of capital gains taxes on investors' trading behavior and portfolio asset allocations(Alan et al (2010);Buhlmann et al (2020)). …”