Title

Rethinking How We Score Capital Gains Tax Reform

Author(s)

Natasha Sarin Natasha Sarin (US Treasury Department)

Lawrence Summers Lawrence Summers (Harvard University, NBER)

Owen Zidar Owen Zidar (Princeton University, NBER)

Eric Zwick Eric Zwick (University of Chicago Booth, NBER)

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 rise of pass-throughs and index funds has shifted the composition of capital gains in recent years, such that the share of gains that are highly elastic to the tax rate has likely declined. If some components are less elastic, then their elasticity should get more weight when scoring big changes because they will comprise more of the remaining tax base. Third, closer parity to income rates would provide a backstop to rest of tax system. Fourth, additional base-broadening reforms, like eliminating stepped-up basis, making charitable giving a realization event, reforming donor advised funds, and limiting opportunity zones to places with the highest poverty rates, 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 hundreds of billions more revenue over a decade than other leading estimates suggest.

Creation Date

2022-06

Section URL ID

Paper Number

298

URL

https://gceps.princeton.edu/wp-content/uploads/2022/06/wp298_Zidar-etal_capgains.pdf

File Function

Jel

H00, H20, H30

Keyword(s)

Capital gains, taxes, tax reform, tax rates

Suppress

false

Series

3