Title

The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates

Author(s)

Ole Agersnap Ole Agersnap (Princeton University)

Owen Zidar Owen Zidar (Princeton University)

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 10-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.

Creation Date

2021-12

Section URL ID

Paper Number

2021-75

URL

https://scholar.princeton.edu/sites/default/files/capgains_az.pdf

File Function

Jel

E62, H25, H71

Keyword(s)

U.S., Northern America, Revenue, Tax, Taxation

Suppress

false

Series

13