Taxation of Capital Gains with Deferred Realization

Posted: 31 Jan 2008 Last revised: 16 Mar 2008

See all articles by Christopher Coyne

Christopher Coyne

Saint Joseph's University

Frank J. Fabozzi

EDHEC Business School

Uzi Yaari

Rutgers University; School of Business-Camden

Abstract

This paper challenges accepted methods of calculating the effect of deferred realization on the effective rate of capital gains tax paid by common shareholders and their overall tax burden. Those methods are shown to implicitly assume the special case of gains accrued in lump sum, even under the common scenario of gains accrued gradually over time. A widely-accepted method is also shown to overstate the effect of deferral by implicitly using the internal rate of return as a discount rate. The valuation-based method proposed here is especially useful for growth stocks where gains are accrued gradually and realized in lump sum. The same method is used to calculate the firm's cost of retained earnings under a finite deferral period. Depending on the tax and interest rates and the extent of deferment, the accuracy gained by using the proposed method can better inform shareholders, their firm's investment and distribution policies, and government tax policy.

See reply: National Tax Journal, Vol. 44, No. 1, March 1991.

Keywords: growth stocks, shareholder effective capital gains tax, capital gains tax deferment, cost of capital, share valuation, payout policy

JEL Classification: G35, H24, H25

Suggested Citation

Coyne, Christopher and Fabozzi, Frank J. and Yaari, Uzi, Taxation of Capital Gains with Deferred Realization. National Tax Journal, Vol. 42, No. 4, pp. 475-485, December 1989, Available at SSRN: https://ssrn.com/abstract=1088264

Christopher Coyne

Saint Joseph's University ( email )

5600 City Avenue,
Philadelphia, PA 19131
United States

Frank J. Fabozzi

EDHEC Business School ( email )

France
215 598-8924 (Phone)

Uzi Yaari (Contact Author)

Rutgers University ( email )

School of Business
Camden, NJ 08102
United States
610-664-2086 (Phone)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

School of Business-Camden ( email )

Rutgers University
227 Penn Street
Camden, NJ 08102
United States
610-664-2086 (Phone)
610-664-2198 (Fax)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
617
PlumX Metrics