Capital gains taxation and asset price volatility

Pau Belda
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Pau Belda: Bank of England

No 1200, Bank of England Staff Working Paper series from Bank of England

Abstract: Do capital gains tax cuts destabilize or stabilize asset prices? In an asset pricing model with heterogeneous agents and realization-based taxation, a tax cut has two opposing effects. It dampens volatility by reducing realization-based trading frictions, but also amplifies it by strengthening the pass through from expectations to prices, fuelling self-fulfilling fluctuations. Estimated on US stock-market data, the model implies that the sequence of tax cuts since the 1970s triggered a net increase in volatility of about +35%, driven primarily by stronger belief-to-price pass-through. Policy experiments suggest a tax on unrealized gains robustly reduces volatility, whereas a financial transaction tax has mixed effects.

Keywords: Capital gains taxation; asset pricing; learning (search for similar items in EconPapers)
JEL-codes: D83 D84 E44 G12 G14 H20 H31 (search for similar items in EconPapers)
Pages: 128
Date: 2026-08-21
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:023541

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