The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates
This paper uses an event study 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.
We thank Coly Elhai and Stephanie Kestelman for providing excellent research assistance on this project. We also thank Alan Auerbach, Jane Gravelle, David Kamin, Henrik Kleven, Ilyana Kuziemko, Juan Carlos Suárez Serrato, Danny Yagan, and Eric Zwick for helpful conversations and suggestions. This work is supported by National Science Foundation under Grant Number 1752431. We declare that we have no relevant or material financial interests that relate to the research described in this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.