The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates

47 Pages Posted: 17 Aug 2020 Last revised: 14 Sep 2022

See all articles by Ole Agersnap

Ole Agersnap

Princeton University

Owen Zidar

Princeton University

Date Written: August 2020

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 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.

Suggested Citation

Agersnap, Ole and Zidar, Owen, The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates (August 2020). NBER Working Paper No. w27705, Available at SSRN: https://ssrn.com/abstract=3675257

Ole Agersnap (Contact Author)

Princeton University

Owen Zidar

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

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