Abstract

http://ssrn.com/abstract=349148
 
 

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The Holding Period Distinction of the Capital Gains Tax


Steven N. Kaplan


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

September 1981

NBER Working Paper No. w0762

Abstract:     
United States tax law distinguishes between short-term and long-term capital gains. By taxing long-term gains at a lower rate the law creates an incentive for investors to postpone the realization of short-term gains. This study examines the lock-in effect induced by the differential tax treatment of long- and short-term gains. Analysis of data on corporate stock transactions from 1973 suggests that the lock-in effect is large and, thus, causes investors to alter their investment portfolios. The existence of such an effect is inefficient and results in a reduction in capital market efficiency. The inefficiency might be justified if there were convincing reasons which supported the existence of the holding period distinction. It is commonly argued, for instance, that eliminating the distinction would encourage short-term speculation at the expense of long-term commitment to capital. It is also claimed that this would result in a loss of revenue to the government. This study relies on IRS data and simulations using the NBER-TAXSIM file to examine the validity of these arguments. The results of this study suggest that the holding period distinction is not very effective in deterring speculation and does not increase government revenues; in fact, it may decrease them.

Number of Pages in PDF File: 34

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Date posted: August 19, 2004  

Suggested Citation

Kaplan, Steven N., The Holding Period Distinction of the Capital Gains Tax (September 1981). NBER Working Paper No. w0762. Available at SSRN: http://ssrn.com/abstract=349148

Contact Information

Steven Neil Kaplan (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4513 (Phone)
773-702-0458 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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