JATA - Spring 1997

Volume 19, No. 1

The Relationship Between Income Tax Changes and Stock Market Trading Volume

Robert C. Ricketts and Richard M. Walter


This paper reports the results of a study designed to investigate the long-term reactions of investors to changes in the taxation of capital gains imposed by the 1981 and 1986 tax acts. Trading volume patterns are analyzed for portfolios of depreciated and appreciated stocks. The results are generally consistent with expectations based on a tax-induced model of investor trading behavior.

Specifically, the results indicate that the 1981 tax act, which decreased the tax cost of selling appreciated securities by reducing the maximum tax rate applicable to long-term capital gains, was followed by a sustained increase in trading volume for those stocks. The 1981 tax act increased the tax cost of selling loss stocks. After a period of adjustment following the enactment date, loss-stock trading volume declined. In contrast, the 1986 tax act decreased the cost of selling depreciated securities and appears to have stimulated trading volume in those securities over a sustained period. The impact on trading volume for gain stocks, however, appears to have been limited to a short-term reaction during the latter part of 1986.

A Study of the Effect of Taxpayer Risk Perceptions on Ambiguous Compliance Decisions

Anne L. Christensen and Peggy A. Hite


The purpose of this study is to determine if taxpayers' risk perceptions and subsequent reporting decisions are influenced by the type of reporting decision (income or deduction), framing effects (win or lose), and level of certainty (a 33, 55, or 75 percent chance of withstanding an IRS challenge). Over 400 taxpayers completed and returned a mail survey that requested the respondents to decide how they would report either an ambiguous income or an ambiguous deduction item. The results indicate that when taxpayers' risk propensities are considered, taxpayers' risk perceptions differ for ambiguous income and deduction items and their reporting decisions are influenced by those differences. In addition, taxpayers' decisions are influenced by level of certainty but not by framing effects. The respondents indicated a greater willingness to take aggressive positions for an ambiguous deduction than for ambiguous income. They also took significantly more aggressive positions when the level of certainty increased from 33 to 55 percent. There was no significant difference in decisions when the level of certainty increased from 55 to 75 percent.

Experimental Evidence on the Effects of Tax Incentives on Risky Security Prices

Susan E. Anderson and Janet Butler


The price of an asset is influenced by both its riskiness and its tax treatment. This study examines the effects of risk and tax treatment on asset prices by conducting an experimental market. Two different forms of tax incentives are examined: preferential treatment of capital gains and an unlimited deduction for capital losses. The study found that securities with favorable t ax treatment were higher priced than equally risky, non-tax-favored securities. There was no difference in the price of a high-risk, tax-favored security and a lower-risk, fully-taxable (benchmark) security when the tax-favored security received only one tax benefit. Risky securities receiving favorable capital gain and loss treatment were higher priced than the benchmark security. However, these results are dependent upon the actual magnitudes of the tax rates studied.

Simplification of Schedule C for Sole Proprietorships: Results from a Survey of Tax Practitioners

Cherie J. O'Neil, Donald P. Samelson, and Michael Harkness


This study extends the work of Long and Swingen (1987) and Carnes and Cuccia (1996) by examining tax practitioner perceptions of tax complexity as it relates to the Schedule C.   It is based on a survey of tax practitioners conducted by members of the Complexity Reduction Committee of the American Taxation Association.  According to respondents, the major factors contributing to unnecessary complexity for the self-employed are the rules regarding auto expense, depreciation expense and the office-in-home deduction.   Practitioners express support for simplifying the computation and reporting of these deductions.  They do not view Schedule C-EZ as an improvement over Schedule C and do not make extensive use of it.  The report of the committee, based upon this study, is presented in appendix A.

Integrating Tax History Into The Introductory Tax Course

William D. Samson


This paper urges that tax history be included as part of the introductory tax course because history helps explain the complexity of much of the current law. History also can set the stage for understanding how and why the tax law may evolve in response to future changes in taxpayer behavior, in society, in economic conditions, or in political circumstances. Because textbook coverage of tax history is uneven at best, instructors need to consider integrating history into lectures or out-of-class activities. To assist, this paper identifies sources of tax history and links these resources to topics typically covered in the introductory tax course. Methods of combining history with other activities are described.