This paper investigates whether investors are compensated for the tax burden of equity securities. Efiective tax rates on equity securities vary due to frequent tax reforms and due to persistent difierences in propensities to pay dividends. The paper flnds an economically and statistically signiflcant relationship between risk-adjusted stock returns and efiective personal tax rates using a new data set covering tax burdens on a cross-section of equity securities between 1927 and 2004. Consistent with tax capitalization, stocks facing higher efiective tax rates tend to compensate taxable investors by generating higher before-tax returns.