Permanent and Transitory Responses to Capital Gains Taxes: Evidence from a Lifetime Exemption in Canada

64 Pages Posted: 9 Mar 2021

See all articles by Adam Lavecchia

Adam Lavecchia

McMaster University; IZA Institute of Labor Economics

Alisa Tazhitdinova

University of California, Santa Barbara (UCSB)

Multiple version iconThere are 3 versions of this paper

Date Written: January 11, 2021

Abstract

Using panel data on a 20% random sample of Canadian taxpayers, we study behavioral responses to the cancellation of a lifetime capital gains exemption that resulted in increased capital gains taxation for some individuals. The unique setting allows us to distinguish between short-term avoidance responses and permanent responses to capital gains taxes. We show that the exemption did not change the number of taxpayers reporting positive capital gains, and thus unlikely resulted in increased participation in capital markets. However, the exemption cancellation slightly increased capital gains realizations of the existing traders.

Keywords: capital gains tax, real responses, avoidance, re-timing

JEL Classification: H24, H31, G51

Suggested Citation

Lavecchia, Adam and Tazhitdinova, Alisa, Permanent and Transitory Responses to Capital Gains Taxes: Evidence from a Lifetime Exemption in Canada (January 11, 2021). Available at SSRN: https://ssrn.com/abstract=3764126 or http://dx.doi.org/10.2139/ssrn.3764126

Adam Lavecchia

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-525-9140 (Phone)

IZA Institute of Labor Economics ( email )

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

Alisa Tazhitdinova (Contact Author)

University of California, Santa Barbara (UCSB) ( email )

Santa Barbara, CA 93106
United States

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