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The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates

  • Ole Agersnap
  • Owen Zidar
American Economic Review: Insights
vol. 3, no. 4, December 2021
(pp. 399-416)
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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.

Citation

Agersnap, Ole, and Owen Zidar. 2021. "The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates." American Economic Review: Insights, 3 (4): 399-416. DOI: 10.1257/aeri.20200535

Additional Materials

JEL Classification

  • E62 Fiscal Policy
  • H25 Business Taxes and Subsidies including sales and value-added (VAT)
  • H71 State and Local Taxation, Subsidies, and Revenue