Does differential taxation of short-term relative to long-term capital gains affect long-term investment?

Pressure from short-horizon investors can hurt investments in innovative, long-run value-increasing projects. We explore the efficacy of a commonly proposed tax-based policy tool to mitigate this problem: the imposition of differentially greater taxes on short-term capital gains vis-à-vis long-term capital gains. Using a panel of 30 OECD countries in which seven countries exhibit 21 changes to differential capital gains taxation over 1991-2006, we find that rewarding longer-term ownership through lower taxes is associated with greater innovation. The evidence adds to our understanding of the real effects of taxation on investor trading and informs the debate on the use of capital gains taxes to address corporate myopia.

Keywords: capital gains taxes, real effects, myopia, investment, short-termism, innovation

JEL Classification: G38, H20, H24, O31

Suggested Citation: Suggested Citation

He, Eric and Jacob, Martin and Vashishtha, Rahul and Venkatachalam, Mohan, Does differential taxation of short-term relative to long-term capital gains affect long-term investment? (December 30, 2021). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3383649 or http://dx.doi.org/10.2139/ssrn.3383649