Research / BFI Working PaperJan 25, 2021

Rethinking How We Score Capital Gains Tax Reform

Natasha Sarin, Lawrence H. Summers, Owen M. Zidar, Eric Zwick

We argue the revenue potential from increasing tax rates on capital gains may be substantially greater than previously understood. First, many prior studies focus primarily on short-run taxpayer responses, and so miss revenue from gains that are deferred when rates change. Second, the composition of capital gains has shifted in recent years, such that the share of gains that are highly elastic to the tax rate has likely declined. Third, focusing on capital gains tax collection may understate fiscal spillovers from decreasing the preferential tax treatment for capital gains. Fourth, additional base-broadening reforms, like eliminating stepped-up basis and making charitable giving a realization event, will decrease the elasticity of the tax base to rate changes. Overall, we do not think the prevailing assumption of many in the scorekeeping community—that raising rates to top ordinary income levels would raise little revenue—is warranted. A crude calculation illustrates that raising capital gains rates to ordinary income levels could raise $1 trillion more revenue over a decade than other estimates suggest. Given the magnitudes at stake, scorekeeping procedures employed in evaluating capital gains should be made more transparent and be the subject of external professional debate and review.

More Research From These Scholars

BFI Working Paper Nov 16, 2020

Did the Paycheck Protection Program Hit the Target?

Joao Granja, Christos Makridis, Constantine Yannelis, Eric Zwick
Topics:  COVID-19
White Paper Apr 8, 2020

Business Continuity Insurance and Loans: Keeping America’s Lights On During The Pandemic

Samuel G. Hanson, Jeremy C. Stein, Adi Sunderam, Eric Zwick
Topics:  COVID-19
BFI Working Paper Jun 30, 2020

Is Attention Produced Rationally?

Erin T. Bronchetti, Judd B. Kessler, Ellen B. Magenheim, Dmitry Taubinsky, Eric Zwick
Topics:  Technology & Innovation