Rethinking How We Score Capital Gains Tax Reform

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 short-run taxpayer responses, and so miss that are deferred when change. Second, composition of has shifted in recent years, such share highly elastic to rate likely declined. Third, focusing collection understate fiscal spillovers decreasing preferential treatment for gains. Fourth, additional base-broadening reforms, like eliminating stepped-up basis making charitable giving a realization event, will decrease elasticity base changes. Overall, we do not think prevailing assumption scorekeeping community—that raising top ordinary income levels would raise little revenue—is warranted. A crude calculation illustrates could $1 trillion more over decade other estimates suggest. Given magnitudes at stake, procedures employed evaluating should made transparent subject external professional debate review.