Capital Gains Taxes and Trading Incentives
64 Pages Posted: 9 Feb 2013 Last revised: 7 Dec 2016
Date Written: October 3, 2015
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
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