Scandinavian Working Papers in Economics

HUI Working Papers,
HUI Research

No 6: Do High Taxes Lock-in Capital Gains? Evidence from a Flat Rate Tax System

Sven-Olov Daunfeldt (), Ulrika Praski-Ståhlgren () and Niklas Rudholm ()
Additional contact information
Sven-Olov Daunfeldt: The Swedish Retail Institute (HUI), Postal: Regeringsgatan 60, SE-103 29 Stockholm, Sweden
Ulrika Praski-Ståhlgren: The Department of Economics, Postal: University of Gävle, SE-801 76 Gävle, Sweden
Niklas Rudholm: The Swedish Retail Institute (HUI), Postal: Regeringsgatan 60, SE-103 29 Stockholm, Sweden

Abstract: The purpose of this paper is to study, using a comprehensive Swedish panel data set, whether investors are less willing to realize capital gains when the marginal tax rate on capital gains is relatively high. In Sweden capital gains are taxed independently of ordinary income at a flat rate, making it possible to avoid endogenity problems and to include direct measures of capital gains taxation in the empirical analysis. The results indicate that a 10% increase in capital gains tax rate reduces the number of realizations of capital gains with 8.7% and the realized amount, given the decision to realize, with 1.9%. In addition, wealthy individuals seem to respond more to changes in capital gains tax rates than less-wealthy individuals.

Keywords: Capital gains realizations; tax avoidance; panel data

JEL-codes: H24; H31

25 pages, January 31, 2007

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