Skip to main content

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

Abstract

The purpose of this paper is to study whether investors’ willingness to realize capital gains falls when the marginal tax rate on capital gains is raised. We use a rich register-based panel data set covering almost 8% of the Swedish population. The results indicate that a 10% increase in capital gains tax rate reduces the number of realizations of capital gains with 8.7% and the realized amount, given the decision to realize, with 1.9%. In addition, we find that wealthy individuals seem to respond more to changes in capital gains tax rates than less-wealthy.

This is a preview of subscription content, access via your institution.

References

  • Agell, J., Englund, P., & Södersten, J. (1998). Incentives and redistribution in the welfare state: The Swedish tax reform. Oxford: MacMillian.

    Google Scholar 

  • Auerbach, A. J. (1988). Capital gains taxation in the United States: realizations, revenue and rhetoric. Brookings Papers on Economic Activity, 2, 595–631.

    Article  Google Scholar 

  • Auerbach, A. J., & Siegel, J. M. (2000). Capital-gains realizations of the rich and sophisticated. American Economic Review, 90, 276–282.

    Article  Google Scholar 

  • Auerbach, A. J., Burman, L. E., & Siegel, J. M. (2000). Capital gains taxation and tax avoidance: new evidence from panel data. In J. Slemrod (Ed.), Does Atlas shrug? The economic consequences of taxing the rich. Cambridge: Harvard University Press.

    Google Scholar 

  • Auten, G. E., & Clotfelter, C. T. (1982). Permanent versus transitory tax effects and the realization of capital gains. Quarterly Journal of Economics, 97, 613–632.

    Article  Google Scholar 

  • Auten, G. E., & Cordes, J. (1991). Cutting capital gains taxes. Journal of Economic Perspectives, 5, 181–192.

    Google Scholar 

  • Auten, G. E., & Joulfaian, D. (2001). Bequest taxes and capital gains realization. Journal of Public Economics, 81, 213–229.

    Article  Google Scholar 

  • Bogart, W. T., & Gentry, W. M. (1995). Capital gains taxes and realizations: Evidence from interstate comparisons. The Review of Economic and Statistics, 77, 267–282.

    Article  Google Scholar 

  • Brennan, G., & Buchanan, J. M. (1980). The power to tax: analytical foundations of a fiscal constitution. Cambridge: Cambridge University Press.

    Google Scholar 

  • Bräuninger, T. (2005). A partisan model of government expenditure. Public Choice, 125, 409–429.

    Article  Google Scholar 

  • Burman, L. E., & Randolph, W. C. (1994). Measuring permanent responses to capital-gains tax changes in panel data. American Economic Review, 84, 794–809.

    Google Scholar 

  • Chamley, C. (1986). Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica, 54, 607–622.

    Article  Google Scholar 

  • Feldstein, M., Slemrod, J., & Yitzhaki, S. (1980). The effects of taxation on the selling of corporate stock and the realizations of capital gains. Quarterly Journal of Economics, 95, 779–791.

    Google Scholar 

  • Gillingham, R., & Greenlees, J. S. (1992). The effect of capital gains tax rates on capital gains tax revenues: Another look at the evidence. National Tax Journal, 45, 167–178.

    Google Scholar 

  • Hendershott, P. H., Toder, E., & Won, Y. (1991). Effects of capital gains on revenue and economic efficiency. National Tax Journal, 44, 21–40.

    Google Scholar 

  • Holt, C., & Shelton, J. (1962). The lock-in effect of the capital gains tax rate. National Tax Journal, 15, 337–352.

    Google Scholar 

  • Jones, J. D. (1989). An analysis of aggregate time series capital gains equations. Office of Tax Analysis Paper No 65, US Department of the Treasury, Washington DC.

  • Judd, K. (1985). Redistributive taxation in a simple perfect foresight model. Journal of Public Economics, 28, 59–83.

    Article  Google Scholar 

  • Mankiw, N. G., Weinzierl, M., & Yagan, D. (2009). Optimal taxation in theory and practice. Harvard Institute of Economic Research Discussion Papers No 2176, Harvard University.

  • Meade, J. A. (1990). The impact of different capital gains tax regimes on the lock-in effect and new risky investment decisions. The Accounting Review, 65, 406–431.

    Google Scholar 

  • Minarik, J. J. (1981). Capital gains. In H. J. Aaron & J. H. Pechman (Eds.), How taxes affect economic behavior. Washington: Brookings Institution.

    Google Scholar 

  • Olson, M. (1982). The rise and decline of nations. New Haven: Yale University Press.

    Google Scholar 

  • Seltzer, L. H. (1951). The nature and tax treatment of capital gains and losses. New York: National Bureau of Economic Research.

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Sven-Olov Daunfeldt.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Daunfeldt, SO., Praski-Ståhlgren, U. & Rudholm, N. Do high taxes lock-in capital gains? Evidence from a dual income tax system. Public Choice 145, 25–38 (2010). https://doi.org/10.1007/s11127-009-9526-8

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11127-009-9526-8

Keywords

  • Capital gains realizations
  • Tax avoidance
  • Tax policy
  • Panel data

JEL Classification

  • H24
  • H31