The Character and Determinants of Corporate Capital Gains

This paper analyzes how corporate capital gains taxes affect the capital gains realization decisions of firms. The paper outlines the tax treatment of corporate capital gains, the consequent incentives for firms with gains and losses, the efficiency consequences of these taxes in the context of other taxes and capital market distortions, and the response of firms to these incentives. Despite receiving limited attention, corporate capital gains realizations have averaged 30 percent of individual capital gains realizations over the last 50 years and have increased dramatically in importance over the last decade. By 1999, the ratio of net long-term capital gains to income subject to tax was 21 percent and was distributed across various industries, which suggests the importance of realization behavior to corporate financing decisions. Time-series analysis of aggregate realization behavior demonstrates that corporate capital gains taxes affect realization behavior significantly. Similarly, an analysis of firm-level investment and property, plant, and equipment (PPE) disposal decisions and gains recognition behavior also suggests an important role for these taxes in determining when firms raise money by disposing of assets and realizing gains.