Capital Gains Taxes and Trading Incentives

64 Pages Posted: 9 Feb 2013 Last revised: 7 Dec 2016

See all articles by Mattia Landoni

Mattia Landoni

Southern Methodist University (SMU) - Finance Department

Date Written: October 3, 2015

Abstract

Once all present and future tax consequences of a sale are included, the effective tax rate on capital gains and losses is almost always less than the statutory tax rate, and it is asset- and investor-specific. As demonstration, I compute the effective tax rates for taxable and tax-exempt bonds held by property-casualty insurers (0 to 10% versus 15 to 30%) and show empirically that because of the higher effective tax rate, property-casualty insurers are more reluctant to realize gains on tax-exempt bonds, compared to taxable bonds, even though all gains are taxed at a statutory rate of 35%.

Keywords: Capital gains, taxes, lock-in, insurance, municipal, bonds

JEL Classification: G11, G12, G18, G22, G28, G34

Suggested Citation

Landoni, Mattia, Capital Gains Taxes and Trading Incentives (October 3, 2015). Columbia Business School Research Paper No. 13-6. Available at SSRN: https://ssrn.com/abstract=2213239 or http://dx.doi.org/10.2139/ssrn.2213239

Mattia Landoni (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States

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