TAX-REFORM AND REALIZATIONS OF CAPITAL GAINS IN 1986

The Tax Reform Act (TRA) of 1986 provides a natural experiment for exa mining how taxpayers respond to transitory capital gains tax rates. Th e act, passed in the summer of 1986, rendered the 20 percent top statu tory tax rate, in effect from 1981 to 1986, transitory. This paper dev elops a model of taxpayer behavior in response to transitory tax chang es and tests its implications using data on asset transactions in the Sales of Capital Assets (SOCA) panel compiled by the IRS. We find evid ence that responses to transitory tax changes are dramatic and general ly consistent with theory.