Working Paper: NBER ID: w27705
Authors: Ole Agersnap; Owen M. Zidar
Abstract: This paper uses a direct-projections approach to estimate the effect of capital gains taxation on realizations at the state level, and then develops a framework for determining revenue-maximizing rates at the federal level. We find that the elasticity of revenues with respect to the tax rate over a ten-year period is -0.5 to -0.3, indicating that capital gains tax cuts do not pay for themselves, and that a 5 percentage point rate increase would yield $18 to $30 billion in annual federal tax revenue. Our long-run estimates yield revenue-maximizing capital gains tax rates of 38 to 47 percent.
Keywords: capital gains tax; elasticity; revenue-maximizing rates
JEL Codes: H0; H2; H21; H24; H71; R5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital gains tax rate (H24) | elasticity of revenues (H30) |
| capital gains tax cuts (H24) | revenues (H27) |
| 5 percentage point increase in capital gains tax rates (H24) | additional $18 to $30 billion in annual federal tax revenue (H27) |
| capital gains tax rate (H24) | capital gains realizations (G19) |
| elasticity of capital gains realizations (H32) | responsiveness to tax rate changes (H32) |
| long-run estimates (C51) | revenue-maximizing capital gains tax rates (H21) |