Investment Taxation and Portfolio Performance
41 Pages Posted: 25 Jul 2009 Last revised: 1 May 2012
Date Written: April 30, 2012
Taxes have a first-order impact on portfolio returns. Most research mistakenly assumes that portfolios command similar tax burdens, or that tax burdens are proportional to dividend yields. Portfolio strategies differ in the pace of capital gains realization. We use the federal tax codes from 1926 through 2006 to construct the after-tax returns that individual investors, corporations, and broker-dealers would have generated on a set of benchmark portfolios. For an individual at the 99th income percentile, the effective tax rates on SMB and HML, respectively, are 7 and 15 times greater than the tax rate on the market premium.
Keywords: taxes, portfolio performance
JEL Classification: G11, H24
Suggested Citation: Suggested Citation