Capital gain from liquidating dividends accomodating web pages for the deaf
Since changes in these policies often provide added power to our tests of the impact of capital gains taxes on share prices, let's consider the necessary conditions for a change in the long-term capital gains tax rate to affect share prices.
To begin with, the marginal investor in the firm must be an individual or a flow-through entity that passes capital gains to individual tax returns.
Under these conditions, share prices would never change and the company's value at liquidation would equal the shareholder's original capital contribution.
Currently the appreciation on investments held for more than one year (long-term capital gains) is taxed at a maximum rate of 15 percent while the appreciation on investments held for shorter periods (short-term capital gains) is taxed at the ordinary tax rate, currently capped at 35 percent.
Policy debates about the level and appropriateness of capital gains taxes almost always revolve around the long-term capital gains tax rate and the length of the requisite holding period.
All of these conditions must hold for a change in the long-term capital gains tax rate to affect prices (other than through indirect macroeconomic shifts).
Similar conditions must hold for other changes in the taxation of capital gains to affect share prices.
This assumes that profits monetize as they are earned, enabling their immediate distribution as cash dividends.
It also assumes that expected earnings never change.
If other investors (for example, qualified retirement plans, corporations, tax-exempt organizations, or foreign entities) are setting prices, then changes in the long-term rate should have no effect on prices because preferential rates for long-term gains only apply to individuals.
Furthermore, the marginal investor must be willing to hold the stock for the obligatory long-term holding period, must dispose of the stock in a taxable manner (for example, not as a charitable donation or bequest), must intend to comply with the law (capital gains noncompliance is known to exceed that of wages, dividends, interest, and many other sources of income), and must not have anticipated the tax rate change.
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