Rethinking How We Score Capital Gains Tax Reform

Natasha Sarin, Lawrence Summers, Owen Zidar and Eric Zwick
Additional contact information
Natasha Sarin: US Treasury Department
Eric Zwick: University of Chicago Booth, NBER

Working Papers from Princeton University, Department of Economics, Center for Economic Policy Studies.

Abstract: 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 rise of pass-throughs and index funds has shifted the composition of capital gains in recent years, such that the share of gains that are highly elastic to the tax rate has likely declined. If some components are less elastic, then their elasticity should get more weight when scoring big changes because they will comprise more of the remaining tax base. Third, closer parity to income rates would provide a backstop to rest of tax system. Fourth, additional base-broadening reforms, like eliminating stepped-up basis, making charitable giving a realization event, reforming donor advised funds, and limiting opportunity zones to places with the highest poverty rates, 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 hundreds of billions more revenue over a decade than other leading estimates suggest.

Keywords: Capital gains; taxes; tax reform; tax rates (search for similar items in EconPapers)
JEL-codes: H00 H20 H30 (search for similar items in EconPapers)
Date: 2022-06
New Economics Papers: this item is included in nep-dem, nep-pbe and nep-pub
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https://gceps.princeton.edu/wp-content/uploads/202 ... ar-etal_capgains.pdf

Related works:
Journal Article: Rethinking How We Score Capital Gains Tax Reform (2022)
Chapter: Rethinking How We Score Capital Gains Tax Reform (2021)
Working Paper: Rethinking How We Score Capital Gains Tax Reform (2021)
Working Paper: Rethinking How We Score Capital Gains Tax Reform (2021)
Working Paper: Rethinking How We Score Capital Gains Tax Reform (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:cepsud:298

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