A Study on Lock-In Effect of Capital Gains Tax for Securities in Taiwan Stock Market—An Application of DID Model

Abstract

In this study, we applied classical linear regression model and DID model while minimized the effects of international markets to investigate the short-term and long-term lock-in effects following the announcement of the capital gains tax for securities in Taiwan stock market. Capital gains tax was reintroduced in 2013 in Taiwan, with stocks and securities being the main focus of taxation to prioritizing capital gains tax reform to improve the tax system and promote tax fairness. Although the government's primary consideration is generating tax revenue, scholars have long advocated establishing a fair tax system. However, levying a tax on capital gains for securities would affect the stock market, causing investors to become wary of any investments associated with the capital gains tax. The challenge of balancing the interests of different groups has made the capital gains tax for securities difficult to implement. The empirical results showed the evidence that the changes in trading volume of the Taiwan stock market exhibited negative short-term and long-term lock-in effects caused by the capital gains tax for securities as compared with those in Hong Kong's stock market. The lock-in effect on Taiwan's stock trading volume led to a depression in Taiwan's capital market and reduced another key source of tax revenue for the government (the securities transactions tax). The overall impacts of the tax appear to have generated a loss greater than the gain.

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“…This strategy may not work in case of FII's (Patil, 2017). Applying capital gain tax on securities would affect the volatility of the stock market, making the investors cautious about any kind of investments that includes capital gains tax (Lo, 2015). Amoako-adu, (1992,a) studied the effect of reduction done on the exemption limit of capital gain tax from $500000 in 1985 to $ 100000 in 1987 in Toronto stock exchange of Canada.…”

“…The returns generated from stocks are also subject to capital gains tax but that depends upon the wish of the investor that when he plans to sell the stocks, but the tax produced on dividend is not under the control of the investor. The introduction of capital gain tax in Taiwan stock market as studied by Lo ( 2015) showed both short term and long term lockin effects when it is compared with Hong Kong stock exchange. The study was done after neutralizing the effect of international economic crises on Taiwan and Hong Kong stock exchange.…”