THE IMPACT OF THE CAPITAL GAINS EXEMPTION ON CAPITAL-MARKETS

Using event study methodology we test the hypothesis that the 1985 cap ital gains exemption decreased the marginal effective tax rate on capi tal gains using two samples of stock market prices that control for in dustry and firm level effects of other aspects of the budget. We deriv e estimates of the impact of the exemption on the effective capital ga ins tax rate, and on the user cost of capital. Using existing estimate s of the relationship between the user cost of capital and investment, we find that, depending upon the sample, the exemption may have incre ased real investment by as much as six per cent, or had no impact at a ll.