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Tax Planning by Mutual Funds: Evidence from Changes in the Capital Gains Tax Rate

Feng Chen
University of Toronto - Joseph L. Rotman School of Management

Arthur G. Kraft
London Business School; Cass Business School

Ira S. Weiss
University of Chicago - Graduate School of Business; Columbia Business School - Department of Accounting


October 22, 2009


Abstract:     
We investigate whether open-end and closed-end mutual funds engage in tax planning by testing how they respond to changes in the capital gains tax rates. While previous evidence suggests that individual investors time capital gains realizations (Auerbach, 1988), we might not expect mutual fund managers to tax plan like individuals because fund managers have incentives to consider the tax liability of both current and potential investors. Our question is, conditional on balancing the interests of these two groups of investors, do mutual funds time their capital gains realizations to decrease taxes. Our analysis spans over forty-four years, and six major tax changes, allowing us to examine the effect of both tax rate increases and decreases. Overall, we find evidence consistent with tax planning by managers of both open-end and closed-end funds, and that both groups of fund managers appear to be more responsive to tax rate decreases than tax rate increases.

Keywords: Mutual Funds, Tax Planning, Capital Gains Taxes

JEL Classifications: M41, G23, H24

Working Paper Series

Date posted: August 25, 1998 ; Last revised: December 07, 2009

Suggested Citation

Chen, Feng, Kraft, Arthur G. and Weiss, Ira S., Tax Planning by Mutual Funds: Evidence from Changes in the Capital Gains Tax Rate (October 22, 2009). Available at SSRN: http://ssrn.com/abstract=996483 or doi:10.2139/ssrn.114726


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Contact Information

Arthur Gerald Kraft (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London NW1 4SA, London NW1 4SA
United Kingdom
Cass Business School ( email )
London EC2Y 8HB Great Britain
Feng Chen
University of Toronto - Joseph L. Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6 Canada
Ira Samuel Weiss
University of Chicago - Graduate School of Business ( email )
5807 S. Woodlawn Ave
Chicago, IL 60637
United States
Columbia Business School - Department of Accounting ( email )
3022 Broadway
622 Uris Hall
New York, NY 10027
United States
HOME PAGE: http://www.gsb.columbia.edu/divisions/accounting/iweiss
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