Mutual Fund Capital Gain Distributions and the Tax Reform Act of 1997

This paper studies long- and short-term capital gains distributions around the time of the Tax Reform Act of 1997, which lowered the maximum tax rate on long-term gains. Using a panel of mutual fund data, I find that fund managers appear to tilt their distributions towards the long-term after 1997. This behavior is consistent with the hypothesis that managers are tax-sensitive, and the estimates are robust to the inclusion of fund-level fixed effects and other controls. I also examine fund capital gains patterns in a difference-in-differences framework, comparing actively managed to index funds, to find a lower-bound estimate of funds' response.