Capital Gains: Rates Realizations and Revenues

Lawrence B. Lindsey

NBER Working Paper No. 1893 (Also Reprint No. r1017)
Issued in April 1986
NBER Program(s):Public Economics

This paper examines the effect of capital gains tax rates on the level of capital gains realizations and the resulting amount of tax revenues. It concludes that capital gains tax revenues are maximized at a rate at the current 20 percent rate or lower, with a central estimate of 16 percent. Some of any gain in revenue due to a rate reduction is likely to be temporary, but the data suggest that even in the long run about 5.4 percent more capital gains will be realized for every one percentage point reduction in the capital gains tax rate.The study uses detailed tabulation data of personal income tax returns for the period 1965-82. It carefully estimates the effect of a number of tax provisions on the marginal tax rate on capital gains. These include the Alternative Tax Computation, Additional Minimum Tax, Maximum Tax on Earned Income, and the Alternative Minimum Tax. In many cases these special provisions had unintended consequences. Household wealth data is used to estimate the stock of unrealized capital gains in taxpayer's portfolios. The study finds a significant difference: between tradeable assets such as real estate and common stock, and non-traded forms of household wealth such as cash and checking accounts. As expected, capital gains realizations closely track changes in traded wealth but are inversely related to changes in non-traded wealth.

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Document Object Identifier (DOI): 10.3386/w1893


  • Lindsey, Lawrence B."Capital Gains Rates, Realizations and Revenues," The Effects of Taxation on Capital Accumulation, ed. by Martin Feldstein. Chicago: UCP, 1987.
  • "Capital Gains Rates, Realizations, and Revenues." From The Effects of Taxation on Capital Accumulation, edited by Martin Feldstein, pp. 69-97, Chicago: University of Chicago Press, 1987.

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