Do capital gain tax rate increases affect individual investors' trading decisions?

This paper examines individual investors' short- and long-term trading reactions to the 1986 Tax Reform Act's (TRA 86) capital gain tax rate increase. Consistent with a tax-induced trading model, we document a December 1986 change in year-end trading patterns. TRA 86 also had long-term effects on individual investors' trading decisions. The results suggest that individual investors were less (more) willing to sell accrued gain (loss) stocks after TRA 86. Our ability to document predicted trading behavior is in part due to our trading metric, which captures individual investors' selling activity better than the volume-based metrics used in prior research. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification. G10; H24.