Taxing away M&A: The effect of corporate capital gains taxes on acquisition activity

Lars Feld, Martin Ruf, Ulrich Schreiber, Maximilian Todtenhaupt and Johannes Voget

No 16/03, Freiburg Discussion Papers on Constitutional Economics from Walter Eucken Institut e.V.

Abstract: Taxing capital gains is an important obstacle to the efficient allocation of resources because it imposes a transaction cost on the vendor which locks in appreciated assets by raising the vendor's reservation price in prospective transactions. For M&As, this effect has been intensively studied with regard to share-holder taxation, whereas empirical evidence on the effect of capital gains taxes paid by corporations is scarce. This paper analyzes how corporate level taxation of capital gains affects inter-corporate M&As. Studying several substantial tax reforms in a panel of 30 countries for the period of 2002-2013, we identify a significant lock-in effect. Results from estimating a Poisson pseudo-maximum-likelihood (PPML) model suggest that a one percentage point decrease in the corporate capital gains tax rate would raise both the number and the total deal value of acquisitions by about 1.1% per year. We use this result to estimate an efficiency loss resulting from corporate capital gains taxation of 3.06 bn USD per year in the United States.

Keywords: corporate taxation; M&A; capital gains tax; lock-in effect (search for similar items in EconPapers)
JEL-codes: G34 H25 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Taxing Away M&A: The Effect of Corporate Capital Gains Taxes on Acquisition Activity (2016)
Working Paper: Taxing away M&A: The effect of corporate capital gains taxes on acquisition activity (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:aluord:1603

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