The Lock-In Effect of the Capital Gains Tax Some Time Series Evidence

Author / Creator

Feldstein, Martin S

Summary

This study presents time-series evidence indicating that capital gains taxation reduces the realization of capital gains. The "lock-in" effect is detectable once we divide individuals into categori...

This study presents time-series evidence indicating that capital gains taxation reduces the realization of capital gains. The "lock-in" effect is detectable once we divide individuals into categories on the basis of how much recent capital gains tax in- creases have affected them. Since the tax law changes, those individuals who are affected have realized significantly less capital gains relative to those not affected. This analysis, in addition to evidence from cross-sectional research reported in Feldstein and Yitzhaki (1978) and Feldstein, Slemrod and Yitzhaki (1978),indicates that estimates of the tax revenue change resulting from a reduction in capital gains taxation based on the assumption of unchanged realized gains may be misleading.

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