How Do Taxes Affect the Trading Behavior of Private Investors? Evidence From Individual Portfolio Data

67 Pages Posted: 17 Apr 2020 Last revised: 1 Jun 2021

See all articles by Florian Buhlmann

Florian Buhlmann

ZEW – Leibniz Centre for European Economic Research

Philipp Dörrenberg

University of Mannheim; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); ZEW – Leibniz Centre for European Economic Research

Benjamin Loos

Technische Universität München (TUM) - TUM School of Management

Johannes Voget

University of Mannheim - Accounting and Taxation

Multiple version iconThere are 2 versions of this paper

Date Written: March 31, 2020

Abstract

How do taxes affect the investment behavior of private stock-market investors? We exploit a large reform of capital-gains taxation in Germany combined with confidential portfolio-level daily panel data to study the causal effect of capital-gains taxes on individual stock-trading behavior and the disposition effect. We find substantial spikes in selling probabilities around an intertemporal tax discontinuity, and no such spikes after the abolishment of the discontinuity. Using difference-in-bunching methods and non-parametric regressions, we quantify the tax effect and identify interesting patterns of heterogeneity. Asset holding periods exhibit a tax elasticity of 0.368 for gains and -0.435 for losses. Because the theoretical tax effect on trading behavior runs in opposite direction to the well-established disposition effect, we further study the interaction between taxes and the disposition effect. We find evidence that the disposition effect is strongly affected by the tax discontinuity through tax motivated selling of both gains and losses.

Suggested Citation

Buhlmann, Florian and Dörrenberg, Philipp and Loos, Benjamin and Voget, Johannes, How Do Taxes Affect the Trading Behavior of Private Investors? Evidence From Individual Portfolio Data (March 31, 2020). Available at SSRN: https://ssrn.com/abstract=3565547 or http://dx.doi.org/10.2139/ssrn.3565547

Florian Buhlmann

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Philipp Dörrenberg (Contact Author)

University of Mannheim ( email )

L 7, 3-5
Mannheim, 68161
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Munich
Germany

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Benjamin Loos

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.professors.wi.tum.de/digitalfinance/home/

Johannes Voget

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

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