The Tax Elasticity of Capital Gains Realizations: Evidence from a Panel of Taxpayers
This paper examines a newly available six-year panel of tax return data
to see what light it sheds on the tax elasticity of capital gains
realizations. Panel data are a particularly valuable source of evidence for
this question, because they can help to distinguish short-run from long-run
effects and because they track the behavior of individuals when faced with
varying tax systems. We find consistent, although not overwhelming, support
for an inverse response of capital gains realizations to changes in their rate
of taxation. The response to deviations from past tax rates generally exceeds
the response to persistent tax changes. The estimated magnitude of the
realization response is large enough to substantially mitigate the revenue
loss that a tax reduction would otherwise cause and may, especially in the
short run, be large enough to generate an increase in revenues. These
results, however, must be qualified by their nonrobustness to specification
changes along a number of dimensions and by the fact that a more general
dynamic specification does not yield plausible results.
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