Even today the debate between the traditional view and the (now not-so-new) new view continues, and studies of the 2003 reduction in the dividend tax are already emerging.Conversely, the appropriate tax on capital gains has long been hotly contested in policy circles but has received comparably little attention from scholars.Empirical work is further impeded because the identity, and thus the tax status, of a firm's shareholders are rarely observable.Thus, although we might predict that the extent to which capital gains taxes affect equity prices is a function of the extent to which individuals hold its stock, we are almost always left with crude estimates of the individual ownership of a specific company.
In the simplest of worlds, capital gains taxes could be fully avoided by distributing all profits to shareholders as they are earned.
In addition, because of complex netting provisions, the long-term capital gains tax rate applies if and only if an individual's long-term capital gains during the year exceed his long-term capital losses and the excess of his short-term capital losses over his short-term capital gains, if any.
Finally, inelasticities in the supply of capital must prevent immediate readjustment throughout the economy following the tax rate change.
Thus, it becomes difficult to explain why so many capital gains taxes are paid without resorting to incompleteness in the capital markets.
Consequently, theory struggles to grapple with the existence of capital gains taxes, leaving empirical work with limited guidance or structure.