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NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates

Ole Agersnap, Owen M. Zidar

NBER Working Paper No. 27705
Issued in August 2020, Revised in December 2020
NBER Program(s):Public Economics

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.

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Document Object Identifier (DOI): 10.3386/w27705

  
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