Permanent Versus Transitory Tax Effects and the Realization of Capital Gains

Do high taxes lock-in capital gains? Evidence from a dual income tax system

“…In addition, given that individuals have decided to realize gains, the results from the level equation indicate that they realize less capital gains when the capital gains tax rate is high. These results support previous findings from the United States (Auten and Clotfelter 1982;Burman and Randolph 1994;Bogart and Gentry 1995;, suggesting that higher taxes on capital gains create a lock-in effect.…”

“…6 Changes in capital gains tax rates thus seem to have a larger effect on the decision whether the individual should realize any capital gains. The estimated tax elasticity with respect to capital gains realizations is smaller than the transitory tax elasticities reported by Auten and Clotfelter (1982), Burman and Randolph (1994) and , but larger than their reported permanent tax elasticities. Our estimated tax elasticity seem to be within the range of elasticities (−0.5 to −0.9) often reported in time-series studies (see e.g., Auten and Cordes 1991) and is slightly higher than the elasticity (−0.65) found by Bogart and Gentry (1995) when studying aggregated state-level realizations in the United States.…”

“…1 This means that an investor has an incentive to realize capital gains when the sum of the household member's ordinary income is temporarily low. Auten and Clotfelter (1982) and Burman and Randolph (1994) suggested that because of this cross-section studies have measured the transitory effect on capital gains realizations behavior, while time-series studies have measured the permanent effect. These researchers therefore used panel data to distinguish between these effects.…”

Tax Regimes and Capital Gains Realizations

“…If individuals face a temporary low income, they might realize accrued capital gains and smooth income to maintain their level of consumption. Apart from the incentive to overcome temporary liquidity constraints by selling capital gains assets, progressive taxation strengthens this tendency (see, for example, Auten and Clotfelter, 1982;Stiglitz, 1983). If the temporary tax rate is significantly lower than the average, permanent tax rate an investor can effectively lower his capital gains tax burden by realizing capital gains in years with liquidity constraints.…”

Capital Gains Taxation and Tax Avoidance: New Evidence from Panel Data

“…Much empirical research, however, emphasized the potentially large response elasticities to capital gains tax reductions (e.g., Feldstein, Slemrod and Yitzhaki 1980). Subsequent empirical work (including Auten and Clotfelter 1982, Auerbach 1988, and Burman and Randolph 1994 distinguished between shortrun and long-run responses, but thus far has failed to focus on the more sophisticated avoidance strategies detailed in the theoretical literature. This remaining gap between theory and evidence has been due in part to data limitations.…”