Abstract
We use the federal tax codes from 1926 through 2009 to construct the after-tax returns that individual investors, corporations, and broker–dealers would have generated on a set of benchmark portfolios. Portfolio strategies differ in the pace of capital gains realizations. This creates important heterogeneity in effective investment taxation beyond that implied by dividend yields. Tax burdens reduce the return premium that value portfolios earn over growth portfolios and the premium of small market capitalization portfolios over large market capitalization portfolios. Tax burdens exacerbate the equity premium puzzle, although they help explain mixed empirical results about the dividend preferences of high income and corporate investors.