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Capital Market Equilibrium with Personal Tax

George M. Constantinides
Econometrica
Vol. 51, No. 3 (May, 1983), pp. 611-636
Published by: The Econometric Society
DOI: 10.2307/1912150
Stable URL: http://www.jstor.org/stable/1912150
Page Count: 26
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Capital Market Equilibrium with Personal Tax
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Abstract

This paper examines the effect of the capital gains tax on investors' optimal consumption and investment behavior and on equilibrium asset prices in an intertemporal economy. It explictly considers the fact that capital gains and losses on stock are taxed only when the investor sells the stock. Ownership of stock then confers upon the investor a timing option which enables him to realize capital losses immediately and defer capital gains. This option is a large fraction of the total benefit which accrues to the stockholder, and is the prime reason for the novel implications of capital gains taxation, discussed in this paper.

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