Working Paper: NBER ID: w28362
Authors: Natasha Sarin; Lawrence H. Summers; Owen M. Zidar; Eric Zwick
Abstract: We argue the revenue potential from increasing tax rates on capital gains may be substantially greater than previously understood. First, many prior studies focus primarily on short-run taxpayer responses, and so miss revenue from gains that are deferred when rates change. Second, the composition of capital gains has shifted in recent years, such that the share of gains that are highly elastic to the tax rate has likely declined. Third, focusing on capital gains tax collection may understate fiscal spillovers from decreasing the preferential tax treatment for capital gains. Fourth, additional base-broadening reforms, like eliminating stepped-up basis and making charitable giving a realization event, will decrease the elasticity of the tax base to rate changes. Overall, we do not think the prevailing assumption of many in the scorekeeping community—that raising rates to top ordinary income levels would raise little revenue—is warranted. A crude calculation illustrates that raising capital gains rates to ordinary income levels could raise $1 trillion more revenue over a decade than other estimates suggest. Given the magnitudes at stake, scorekeeping procedures employed in evaluating capital gains should be made more transparent and be the subject of external professional debate and review.
Keywords: No keywords provided
JEL Codes: H0; H2; H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing capital gains tax rates (F38) | significantly higher revenue than previously estimated (H27) |
| Raising capital gains tax rates to ordinary income levels (F38) | additional $1 trillion over a decade (H56) |
| Current realization elasticity (approximately 0.7) (D24) | overestimates responsiveness of taxpayers to rate changes (H31) |
| More nuanced understanding of taxpayer behavior (H31) | revenue potential from increasing rates is much higher than suggested by conventional estimates (H27) |
| Share of capital gains that are elastic to tax rates has declined (H31) | affects revenue estimates (H27) |
| Shift in capital gains composition (D33) | decreased share of gains that are highly elastic to tax rates (H31) |