Abstract The tax rate on capital gains of equity has varied substantially over time and correlates negatively with realized capital gains and tax revenue. In our model, investors who anticipate the dynamics of the tax rate in their bond–equity mix realize greater gains when realized equity returns are higher, the capital gains tax rate is lower, and capital losses carried forward are larger. Simulating a calibrated population of investors produces model data consistent with tax revenue from capital gains realizations. Our model can inform the policymaker’s choice of the capital gains tax rate.
Ehling et al. (Tue,) studied this question.
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