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Capital Gains Taxes Under the Tax Reform Act of 1986: Revenue EstimatesUnder Various Assumptions

Lawrence B. Lindsey

NBER Working Paper No. 2215
Issued in April 1987
NBER Program(s):Public Economics

This paper examines the effect of the Tax Reform Act of 1986 on the level of capital gains realizations and tax revenue under a variety of behavioral assumptions. Independent investigations by Feldstein, Slemrod, and Yitzhaki, the Department of Treasury. Lindsey, Auten and Clotfelter, and Minarik, all point to a large, though highly variable, amount of response by taxpayers to changes in capital gains tax rates. The econometric results of each of these papers are reparameterized for use in the National Bureau of Economic Research TAXSIM model. A total of 13 sets of behavioral assumptions are modeled. The results show that the capital gains tax rate increase in the new tax bill is unlikely to produce an increase in capital gains tax revenue. Of the 13 simulations run. 12 produce lower tax revenue over the period of 5 fiscal years being simulated. The final simulation suggests a virtually unchanged level of revenue. Two of the models predict extremely large levels of capital gains realizations in late 1986 in anticipation of the tax rate increases in the coming years. In none of the simulations is any significant increase in the permanent level of capital gains tax revenues predicted.

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Document Object Identifier (DOI): 10.3386/w2215

Published: NTJ, Vol. 40, no. 3 (1987): 489-504.

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