Rethinking How We Score Capital Gains Tax Reform

Natasha Sarin, Lawrence Summers, Owen Zidar, Eric Zwick

Research output: Chapter in Book/Report/Conference proceedingChapter

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 tax rates would provide a backstop to the rest of the 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.

Original languageEnglish (US)
Title of host publicationTax Policy and the Economy
PublisherUniversity of Chicago Press
Pages1-33
Number of pages33
Edition1
DOIs
StatePublished - 2022

Publication series

NameTax Policy and the Economy
Number1
Volume36
ISSN (Print)0892-8649

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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