Dynamic asset pricing effects and incidence of realization-based capital gains taxes

Many analyses of capital gains taxation assume that realization-based taxes are economically similar to accrual-based taxes. In equilibrium, however, the distinctive implications of realization taxes for asset trading through the lock-in effect are associated with distinctive dynamic asset pricing e ffects. Asset prices are increased by the current realization tax, to partl y offset the sale disincentive that the tax would otherwise impose. The res ulting division of the tax burden between buyers and sellers of assets is s imilar to traditional public finance models of excise-tax incidence in prod uct markets. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classi fication. G11: G17; H22.