TAX REFORM AND REALIZATIONS OF CAPITAL GAINS IN 1986

Abstract

The Tax Reform Act (TRA) of 1986 provides a natural experiment for examining how taxpayers respond to transitory capital gains tax rates. The act, passed in the summer of 1986, rendered the 20 percent top statutory tax rate, in effect from 1981 to 1986, transitory. This paper develops a model of taxpayer behavior in response to transitory tax changes and tests its implications using data on asset transactions in the Sales of Capital Assets (SOCA) panel compiled by the IRS. We find evidence that responses to transitory tax changes are dramatic and generally consistent with theory.