A dynamic partial equilibrium model of capital gains taxation

We analyze a multi-period model of capital gains taxation with endogenous prices. Relative to an economy without taxation, a capital gains tax tends to lower prices and increase returns. Abstracting from tax redistribution policies, we find that a taxable investor's welfare falls, a nontaxable investor's welfare rises, and, depending on the tax rate, social welfare may either rise or fall. The taxable investor's tax-timing option increases social welfare but may either increase or decrease tax revenue. Tax rebates for capital losses have little effect on welfare or tax revenue. Implications for empirical asset pricing are identified.