On the destabilizing nature of capital gains taxes |
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| Institution: | 1. Department of Mathematics and School of Economics and Management, University of Bologna, Bologna, Italy;2. Department of Economics, Society and Politics, University of Urbino Carlo Bo, Italy;3. Department of Economics, University of Bamberg, Germany;1. Department of Accountancy and Finance at University of Antwerp, Stadscampus Prinsstraat 13 S.B.329, 2000 Antwerpen, Belgium;2. College of Business, University of Akron, Akron, OH, USA;3. School of Accounting and Finance, University of Vaasa, Wolffintie 34, 65200 Vaasa, Finland;4. Department of Data Science, Economics and Finance at EDHEC Business School, 24 avenue Gustave Delory, 59057 Roubaix Cedex 1, France;1. School of Finance, Renmin University of China, Beijing 100872, China;2. School of Management and Engineering, Nanjing University, Institute of Financial Innovation, Nanjing 210093, China;1. School of Finance, Xinjiang University of Finance and Economics, 449 Middle Beijing Road, Urumqi 830012, PR China;2. Belt & Road Finance Institute, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing 100081, PR China;3. International Business College, South China Normal University, 55 Zhongshan Road, Tianhe District, Guangzhou 510631, PR China |
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| Abstract: | Policymakers around the world impose some form of capital gains taxes to foster the stability of financial markets. Unfortunately, there is no clarity on the effects of capital gains taxes. Based on a stylized behavioral asset-pricing model highlighting the trading activity of extrapolating speculators, we show that policymakers may involuntary destabilize financial markets by imposing capital gains taxes. Most importantly, we find that the imposition of capital gains taxes may trigger endogenous cyclical asset price dynamics occurring around inflated price levels. A number of robustness checks in which we allow for interactions between speculators who use extrapolative and regressive expectation rules confirm our main results. |
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