Diversification and the Taxation of Capital Gains and Losses

Current U.S. law nets the total portfolio of realized capital gains and losses to compute capital gains taxes. Prior research, however, typically ignores the implication of this provision, i.e., the marginal tax rate for a specific gain or loss depends on the taxpayer's total portfolio of realized gains and losses. We find that these nettings introduce complexity into the relation between share values and capital gains taxes, creating an incentive to diversify. For firms with stock returns that are positively (negatively) correlated with those of the overall market, share values generally are decreasing (increasing) in the capital gains tax rate.

On the Hydrodynamic Interaction of Shock Waves with Interstellar Clouds. II. The Effect of Smooth Cloud Boundaries on Cloud Destruction and Cloud Turbulence

The effect of smooth cloud boundaries on the interaction of steady planar shock waves with interstellar clouds is studied using a high-resolution local AMR technique with a second-order accurate axisymmetric Godunov hydrodynamic scheme. A 3D calculation is also done to confirm the results of the 2D ones. We consider an initially spherical cloud whose density distribution is flat near the cloud center and has a power-law profile in the cloud envelope. When an incident shock is transmitted into a smooth cloud, velocity gradients in the cloud envelope steepen the smooth density profile at the upstream side, resulting in a sharp density jump having an arc-like shape. Such a ``slip surface'' forms immediately when a shock strikes a cloud with a sharp boundary. For smoother boundaries, the formation of slip surface and therefore the onset of hydrodynamic instabilities are delayed. Since the slip surface is subject to the Kelvin-Helmholtz and Rayleigh-Taylor instabilities, the shocked cloud is eventually destroyed in $\sim 3-10$ cloud crushing times. After complete cloud destruction, small blobs formed by fragmentation due to hydrodynamic instabilities have significant velocity dispersions of the order of 0.1 $v_b$, where $v_b$ is the shock velocity in the ambient medium. This suggests that turbulent motions generated by shock-cloud interaction are directly associated with cloud destruction. The interaction of a shock with a cold HI cloud should lead to the production of a spray of small HI shreds, which could be related to the small cold clouds recently observed by Stanimirovic & Heiles (2005). The linewidth-size relation obtained from our 3D simulation is found to be time-dependent. A possibility for gravitational instability triggered by shock compression is also discussed.Comment: 62 pages, 16 figures, submitted to Ap