TAX PLANNING BY MUTUAL FUNDS: EVIDENCE FROM CHANGES IN THE CAPITAL GAINS TAX RATE

We investigate whether mutual funds engage in tax planning by testing how they respond to changes in the capital gains tax rates. While previous evidence suggests that individual investors time capital gains realizations, mutual fund managers may not tax plan like individuals because fund managers have incentives to consider the tax liability of both current and potential investors. Our analysis spans over 44 years and six major tax changes, allowing us to examine the effects of both tax rate increases and decreases. Overall, we find evidence consistent with tax planning by managers of both open-end and closed-end mutual funds.