Does Differential Taxation of Short-Term Relative to Long-Term Capital Gains Affect Long-Term Investment?

68 Pages Posted: 16 May 2019 Last revised: 20 May 2021

See all articles by Eric He

Eric He

Duke University - Fuqua School of Business

Martin Jacob

WHU - Otto Beisheim School of Management

Rahul Vashishtha

Duke University

Mohan Venkatachalam

Duke University - Fuqua School of Business

Date Written: May 20, 2021

Abstract

Pressure from short-horizon investors can hurt investments in innovative, long-run value-increasing projects. We explore the efficacy of a commonly proposed tax-based policy tool to mitigate this problem: the imposition of differentially greater taxes on short-term capital gains vis-à-vis long-term capital gains. Using a panel of 30 OECD countries in which seven countries exhibit 21 shocks to differential capital gains taxation over 1991-2006, we find that rewarding longer-term ownership through lower taxes is associated with greater innovation. The evidence adds to our understanding of the real effects of taxation of investor trading and should be of interest to lawmakers and regulators.

Keywords: capital gains taxes, real effects, myopia, investment, short termism, innovation

JEL Classification: G38, H20, H24, O31

Suggested Citation

He, Eric and Jacob, Martin and Vashishtha, Rahul and Venkatachalam, Mohan, Does Differential Taxation of Short-Term Relative to Long-Term Capital Gains Affect Long-Term Investment? (May 20, 2021). Available at SSRN: https://ssrn.com/abstract=3383649 or http://dx.doi.org/10.2139/ssrn.3383649

Eric He

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

HOME PAGE: http://eriche.net

Martin Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

Rahul Vashishtha (Contact Author)

Duke University ( email )

Durham, NC 27708-0204
United States
919-660-7755 (Phone)
91-660-7971 (Fax)

Mohan Venkatachalam

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

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