Paul L. Caron

Monday, August 17, 2020

The Revenue-Maximizing Capital Gains Tax Rate Is 38-47%

Ole Agersnap (Princeton) & Owen Zidar (Princeton), 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.


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Um, who cares about revenue-maximizing. That’s not how any of this works. Spend some of that Zoom-less time figuring out the economic growth-maximizing rate.

Posted by: Anon | Aug 17, 2020 4:27:35 PM

Anon -- that's not how economic growth works. It depends on population growth and technological progress, neither of which have anything to do with tax rates.

Posted by: Anonymous | Aug 18, 2020 11:42:19 AM

Wow, these professors have nothing to do with their time other than to figure out how to steal from people. Sad!

Posted by: Michael | Aug 18, 2020 12:37:43 PM

My concern with discussions like this is that they do not attempt to characterize the type of business (or the tax events a particular type of business may go through) when trying to calculate "optimal" capital gains.

For example, home builders who build 'speculation' homes wind up with a capital gains event at the finish of each home they build. Which becomes a problem because the gains from one home is used to finance the construction of the next: strip the builder of half their gains and they have less incentive to build homes. And this directly affects the availability of housing stock, contributing to the rising price of housing in urban areas.

The same thing happens with investment portfolios: higher capital gains lock in investors; they have less incentive to try to seek higher yields with better investment opportunities--which then creates a sort of "incumbent" effect where existing investments (shareholder held corporations) can maintain their investors (and thus be somewhat insulated from failure) against upstarts. One could argue this is one of the reason why venture capitalists don't expect incrementally better competitors to enter the market: they want moonshots, companies that explode out of the gate.

Posted by: William Woody | Aug 18, 2020 1:48:24 PM

@Anonymous: I was originally going to ask if you were being serious or just playing around, but I’ve concluded you’re dead serious. Sad!

Posted by: Anon | Aug 19, 2020 9:36:51 PM