The graph plots the log effective average marginal tax rate against the log of the price-dividend long run volatility. The sample is 1954-2012, annual data for the United States. The correlation amounts to -0.84 (p-value = 0.00) for the whole 1954-2012 sample, -0.52 (p-value = 0.01) for 1954-1981 and -0.94 (p-value = 0.00) for the 1982-2012 period.

Capital tax rate is a convex combination of effective dividends, short and long capital gains tax rates. The weights are the fraction of each source of income over total equity income. The overall rate is adjusted by the non-taxable share of equity income.

The long run volatility of the price-dividend is the annual long run component of the price-dividend quarterly conditional variance, extracted using an AR-GARCH-MIDAS model.