Effects of Capital Gains Taxation on Life-Cycle Investment and Portfolio Management

Authors

  • YVES BALCER,

  • KENNETH L. JUDD

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    • University of Wisconsin and World Bank, and Northwestern University and Hoover Institution, respectively. The authors thank Chester Spatt and George Constantinides for their comments.

ABSTRACT

We examine the impact of capital income taxation, both accrual forms of taxation and taxation of realized capital gains, on total savings and the demand for corporate financial instruments. We find that investors may hold both debt and equity in the face of effective collection of capital gains taxation even in a flat tax system. We also find that the two taxes will have substantially different effects on saving and consumption behavior, making it unlikely that the tax structure can be summarized by any single equivalent accrual tax rate.

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