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

45 Pages Posted: 25 Aug 1998 Last revised: 14 Sep 2010

Feng Chen

University of Toronto - Rotman School of Management

Arthur G. Kraft

City University London - Cass Business School

Ira S. Weiss

University of Chicago - Graduate School of Business; Columbia Business School - Department of Accounting

Date Written: September 10, 2010

Abstract

We investigate whether 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, mutual fund managers may not tax plan like individuals because fund managers have incentives to consider the tax liability of both current and potential investors. 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 mutual funds.

Keywords: Mutual funds, capital gains, tax planning, income shifting, tax overhang

JEL Classification: M41, G23, H24

Suggested Citation

Chen, Feng and Kraft, Arthur G. and Weiss, Ira S., Tax Planning by Mutual Funds: Evidence from Changes in the Capital Gains Tax Rate (September 10, 2010). Available at SSRN: https://ssrn.com/abstract=996483 or http://dx.doi.org/10.2139/ssrn.114726

Feng Chen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada

Arthur Gerald Kraft (Contact Author)

City University London - Cass Business School ( email )

London, EC2Y 8HB
Great Britain

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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