Working Paper: NBER ID: w12146
Authors: Clemens Sialm
Abstract: This paper investigates whether investors are compensated for the tax burden of equity securities. Effective tax rates on equity securities vary due to frequent tax reforms and due to persistent differences in propensities to pay dividends. The paper finds an economically and statistically significant relationship between risk-adjusted stock returns and effective personal tax rates using a new data set covering tax burdens on a cross-section of equity securities between 1927 and 2004. Consistent with tax capitalization, stocks facing higher effective tax rates tend to compensate taxable investors by generating higher before-tax returns.
Keywords: tax burden; equity returns; risk-adjusted returns
JEL Codes: G12; H20; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Effective tax rates on equity securities (G12) | Risk-adjusted returns (G11) |
| Higher effective tax rates (H29) | Higher before-tax returns (G19) |
| Effective tax burden (H22) | Higher expected returns (G19) |