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New Evidence on the Tax Elasticity of Capital Gains

Author

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  • Tim Dowd
  • Robert McClelland
  • Athiphat Muthitacharoen

Abstract

This study updates previous research estimating the persistent effect of tax changes on capital gains realizations by using a large panel of tax returns from 1999 to 2008. Similar to earlier studies in the literature, we use the Type II Tobit model to address the sample selection problem and we address the endogeneity problem in the tax variables, but we improve the identification of the tax elasticity by using an exclusion restriction: the presence of carryover loss. The preferred persistent elasticity estimate is –0.72 and is statistically significant and robust to a number of sensitivity tests. We also compare the results of our model to results from the original model applied to contemporary data, and estimate our model on sub-periods. Unlike prior research, this study estimates the tax elasticity of other types of capital gains. We find that pass-through capital gains are highly sensitive to persistent tax changes, but gains from mutual fund distributions are extremely insensitive.

Suggested Citation

  • Tim Dowd & Robert McClelland & Athiphat Muthitacharoen, 2015. "New Evidence on the Tax Elasticity of Capital Gains," National Tax Journal, National Tax Association;National Tax Journal, vol. 68(3), pages 511-544, September.
    • Handle: RePEc:ntj:journl:v:68:y:2015:i:3:p:511-544
    DOI: 10.17310/ntj.2015.3.02
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    Cited by:

    1. Natasha Sarin & Lawrence Summers & Owen Zidar & Eric Zwick, 2022. "Rethinking How We Score Capital Gains Tax Reform," Tax Policy and the Economy, University of Chicago Press, vol. 36(1), pages 1-33.
    2. Karl Schulz, 2021. "Redistribution of Return Inequality," CESifo Working Paper Series 8996, CESifo.
    3. Ole Agersnap & Owen Zidar, 2021. "The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates," American Economic Review: Insights, American Economic Association, vol. 3(4), pages 399-416, December.
    4. Lavecchia, Adam M. & Tazhitdinova, Alisa, 2021. "Permanent and Transitory Responses to Capital Gains Taxes: Evidence from a Lifetime Exemption in Canada," IZA Discussion Papers 14331, Institute of Labor Economics (IZA).
    5. Buhlmann, Florian & Doerrenberg, Philipp & Voget, Johannes & Loos, Benjamin, 2020. "How do taxes affect the trading behavior of private investors? Evidence from individual portfolio data," ZEW Discussion Papers 20-047, ZEW - Leibniz Centre for European Economic Research.
    6. Jeff Larrimore & Richard V. Burkhauser & Gerald Auten & Philip Armour, 2016. "Recent Trends in U.S. Top Income Shares in Tax Record Data Using More Comprehensive Measures of Income Including Accrued Capital Gains," NBER Working Papers 23007, National Bureau of Economic Research, Inc.

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