The Character and Determinants of Corporate Capital Gains
Mihir A. Desai
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)
William M. Gentry
Williams College - Department of Economics
November 23, 2003
Harvard NOM Working Paper No. 03-55
This paper analyzes how corporate capital gains taxes affect the capital gain realization decisions of firms. The paper outlines the tax treatment of corporate capital gains, the consequent incentives for firms with gains and losses, the efficiency consequences of these taxes in the context of other taxes and capital market distortions, and the response of firms to these incentives. Despite receiving limited attention, corporate capital gain realizations have averaged 30 percent of individual capital gain realizations over the last fifty years and have increased dramatically in importance over the last decade. By 1999, the ratio of net long-term capital gains to income subject to tax was 21 percent and was distributed across a variety of industries suggesting the importance of realization behavior to corporate financing decisions. Time-series analysis of aggregate realization behavior demonstrates that corporate capital gains taxes impact realization behavior significantly. Similarly, an analysis of firm-level investment and property, plant, and equipment (PPE) disposal decisions and gain recognition behavior similarly suggests an important role for these taxes in determining when firms raise money by disposing of assets and realizing gains.
Number of Pages in PDF File: 39
Keywords: Corporate Taxation, Capital Gains, Corporate Finanace
JEL Classification: H25, G32, G38, K34, E62
Date posted: December 12, 2003
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