Forecasting Capital Gains Realizations

As an input to its estimates of federal revenues, the Congressional Budget Office (CBO) requires an estimate of capital gains realizations in the current calendar year and forecasts of realizations for the next 10 years. The purpose of our study is to improve the accuracy of the current-year estimates. As background, we describe the models and methods that CBO now uses and briefly mention models developed at other institutions. We then discuss in detail our method for constructing a new model and compare the model’s performance with that of other models by determining how well they would have estimated realizations had they been used in the past. Those comparisons are conducted using increasingly realistic assumptions about the amount of information available at the time the estimates are made. We find that if CBO had used our new model throughout the 1990s, with only the information available when the estimates of realizations were made, CBO’s estimates of current-year realizations would have been more accurate.