Tax Regimes and Capital Gains Realizations
European Accounting Review, Forthcoming
43 Pages Posted: 30 Apr 2011 Last revised: 21 Sep 2016
Date Written: June 15, 2016
This paper contrasts the individual capital gains realization behavior between progressive and proportional tax regimes. Using a longitudinal panel of over 288,000 individuals in Sweden, I exploit the 1991 tax reform in Sweden that changed progressive capital gains tax rates ranging from 12% to 80% to a proportional tax rate of 30%. Using the proportional tax system to control for non-tax reasons to realize capital gains, I show that individuals are highly responsive to capital gains tax incentives created by temporary income changes under a progressive capital gains tax. More specifically, I find that individuals with temporary negative (positive) income changes sell (hold) shares that they would hold (sell) in the absence of temporary tax incentives. Further, I show that high-income individuals are more tax sensitive than low-income individuals. This result indicates that low-income individuals facing temporary negative income changes could trade predominantly for non-tax reasons.
Keywords: Capital Gains Tax, Proportional Tax, Progressive Tax, Top Incomes
JEL Classification: H20, H24, D14, D31
Suggested Citation: Suggested Citation