The Impact of the Capital Gains Exemption on Capital Markets

Kenneth McKenzie and Aileen J. Thompson

Canadian Public Policy, 1995, vol. 21, issue s1, 100-115

Abstract: Using event study methodology, we test the hypothesis that the 1985 capital gains exemption decreased the marginal effective tax rate on capital gains using two samples of stock market prices that control for industry and firm level effects of other aspects of the budget. We derive estimates of the impact of the exemption on the effective capital gains tax rate, and on the user cost of capital. Using existing estimates of the relationship between the user cost of capital and investment, we find that, depending upon the sample, the exemption may have increased real investment by as much as six per cent, or had no impact at all.

Date: 1995
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