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Capital Gains Taxes Under the Tax Reform Act of 1986: Revenue EstimatesUnder Various Assumptions

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  • Lawrence B. Lindsey

Abstract

This paper examines the effect of the Tax Reform Act of 1986 on the level of capital gains realizations and tax revenue under a variety of behavioral assumptions. Independent investigations by Feldstein, Slemrod, and Yitzhaki, the Department of Treasury. Lindsey, Auten and Clotfelter, and Minarik, all point to a large, though highly variable, amount of response by taxpayers to changes in capital gains tax rates. The econometric results of each of these papers are reparameterized for use in the National Bureau of Economic Research TAXSIM model. A total of 13 sets of behavioral assumptions are modeled. The results show that the capital gains tax rate increase in the new tax bill is unlikely to produce an increase in capital gains tax revenue. Of the 13 simulations run. 12 produce lower tax revenue over the period of 5 fiscal years being simulated. The final simulation suggests a virtually unchanged level of revenue. Two of the models predict extremely large levels of capital gains realizations in late 1986 in anticipation of the tax rate increases in the coming years. In none of the simulations is any significant increase in the permanent level of capital gains tax revenues predicted.

Suggested Citation

  • Lawrence B. Lindsey, 1987. "Capital Gains Taxes Under the Tax Reform Act of 1986: Revenue EstimatesUnder Various Assumptions," NBER Working Papers 2215, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2215
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    1. King, Mervyn A. & Fullerton, Don, 2010. "The Taxation of Income from Capital," National Bureau of Economic Research Books, University of Chicago Press, number 9780226436319.
    2. Feldstein, Martin & Yitzhaki, Shlomo, 1978. "The effects of the capital gains tax on the selling and switching of common stock," Journal of Public Economics, Elsevier, vol. 9(1), pages 17-36, February.
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    1. Patric H. Hendershott & Yunhi Won, 1991. "The Long-Run Impact on Federal Tax Revenues and Capital Allocation of a Cut in the Capital Gains Tax Rate," Public Finance Review, , vol. 19(1), pages 3-21, January.
    2. Joseph J. Minarik, 1992. "Capital Gains Taxation, Growth, And Fairness," Contemporary Economic Policy, Western Economic Association International, vol. 10(3), pages 16-25, July.
    3. Bolster, Paul J. & Janjigian, Vahan, 1991. "Dividend Policy and Valuation Effects of the Tax Reform Act of 1986," National Tax Journal, National Tax Association;National Tax Journal, vol. 44(4), pages 511-518, December.
    4. Bolster, Paul J. & Janjigian, Vahan, 1991. "Dividend Policy and Valuation Effects of the Tax Reform Act of 1986," National Tax Journal, National Tax Association, vol. 44(4), pages 511-18, December.

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