Boundaries on the Long-Run Realization Response to Changes in Capital Gains Taxes
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Boundaries on the Long-Run Realization
Response to Changes in Capital Gains Taxes
June 6, 2025
Congressional Research Service
https://crsreports.congress.gov
R48562
SUMMARY
Boundaries on the Long-Run Realization
Response to Changes in Capital Gains Taxes
This report analyzes how responsive taxpayers are to changes in capital gains taxes. Capital gains
occur when an asset increases in value as measured by the price of the asset minus the basis,
which is generally the cost at which the asset was acquired. Capital gains are a form of income
and subject to tax, but only when the asset is sold and the gain is realized. Thus, taxpayers have
some control over when capital gains taxes are paid and at what rate by choosing when to sell an
asset and realize capital gains. All else equal, a decrease in capital gains taxes should encourage
taxpayers to sell assets and realize gains. Likewise, an increase in capital gains taxes should
discourage taxpayers from selling assets and realizing gains.
R48562
June 6, 2025
Mark P. Keightley
Specialist in Economics
Jane G. Gravelle
Senior Specialist in
Economic Policy
How much individuals respond to a decrease or an increase in capital gains taxes can be quantified using the economic
concept of an elasticity, which in the context of this analysis measures the percentage change in realizations divided by the
percentage change in the capital gains tax rate. In theory, the capital gains tax elasticity ranges from negative infinity to zero;
the larger the elasticity is (in absolute terms), the more responsive taxpayers will be. In turn, the more (or less) responsive
individuals are to capital gains taxes, the lower (or higher) tax rates should be to minimize economic distortions and
maximize tax revenue.
The analysis in this report suggests that the maximum long-run (or permanent) capital gains elasticity is between -0.29 to 0.45, with an estimate at the midpoint of positive transaction costs of -0.34. At a -0.34 elasticity, the revenue-maximizing tax
rate would be 65%. This estimate for the capital gains elasticity assumes that in the absence of taxes and transactions costs all
gains would be realized every year. This assumption is almost certainly too high, as there are numerous reasons aside from
taxes and trading costs that would cause individuals to retain assets. If instead it is assumed that only 80% of gains would be
realized, the maximum elasticity ranges from -0.22 to -0.16 for positive transactions costs, with an estimate at the midpoint of
positive transactions costs of -0.19.
A change in the capital gains tax rate may produce smaller revenue effects than would be estimated by simply applying the
tax rate change to currently observed realizations. If individuals respond to a tax cut by realizing more gains or to a tax
increase by realizing fewer gains, this change in realizations can offset some portion of the static revenue effects (the revenue
in the absence of a behavioral response). The share of revenue offset by the realization’s response corresponds to the
elasticity, which at the midpoint elasticities presented in this report would be between 19% and 34%.
The common statistical approach in the literature for estimating the permanent capital gains elasticity has yielded wide
variations in the magnitude of this effect, from -0.22 to -0.98. The major reason that high elasticities were found in some
earlier studies is that the elasticity probably reflected in large part the short-run (or transitory) elasticity, which arises when
taxpayers time their realizations for periods when their tax rates are lower. Although the variations have narrowed in more
recent studies as researchers refined their approaches, these measures indicate that the offset from a tax increase can be as
small as 22% and as large as 98%, while the corresponding revenue-maximizing tax rate can be as high as 100% and as low
as 22%.
The analysis in this report uses an approach that differs from the common statistical methodology and is based on the simple
observation that there is a boundary on the realization response: realizations over time cannot exceed accrued gains. The
larger the existing realizations are relative to accruals, the smaller any potential realizations response can be. Estimates of
realizations relative to accruals over the period 1987-2023 indicate that realizations are approximately 60% of accruals,
although there is some variation owing to uncertainties, primarily the magnitude of noncompliance. These estimates are
paired with the estimates of taxes and transactions costs, and the common functional form used for estimating the realizations
response, to yield an estimate of the size of realizations in the absence of these taxes and transactions costs.
Congressional Research Service
Boundaries on the Long-Run Realization Response to Changes in Capital Gains Taxes
Contents
Introduction ..................................................................................................................................... 1
The Realization-to-Accruals Ratio .................................................................................................. 1
Measuring Tax Rates and Transactions Costs ................................................................................. 2
Estimating the Range of Realization Elasticities ............................................................................. 4
The Relationship of the Limits to Econometric Estimates and Revenue-Estimating
Practices ....................................................................................................................................... 6
Econometric Estimates .............................................................................................................. 6
Revenue-Estimating Practices ................................................................................................... 8
Tables
Table 1. Maximum Capital Gains Elasticity at a 22% Federal Tax Rate, Assuming 100%
of Accruals Are Realized, Various Transactions Costs ................................................................. 4
Table 2. Maximum Capital Gains Elasticity at a 22% Federal Tax Rate, Assuming 80% of
Accruals Realized, Various Transactions Costs............................................................................ 5
Table 3. Effects of Varying Noncompliance Rates Assuming the Midpoint Transactions
Costs ............................................................................................................................................. 6
Table 4. Recent Panel Estimates of Realizations Response ............................................................ 7
Table A-1. Maximum Capital Gains Elasticity at a 22% Federal Tax Rate, Assuming
100% of Accruals Are Realized, Various Transactions Costs, Constant Net-of-Tax
Elasticity ..................................................................................................................................... 10
Table A-2. Maximum Capital Gains Elasticity at a 22% Federal Tax Rate, Assuming 80%
of Accruals Are Realized, Various Transactions Costs, Constant Net-of-Tax Elasticity ............. 11
Table A-3. Effects of Varying Noncompliance Rates Assuming the Midpoint Transactions
Costs, Constant Net-of-Tax Elasticity ......................................................................................... 11
Table A-4. Elasticities by Maximum Realizations As a Percentage of Accruals ............................ 11
Table D-1. Elasticity Model Parameter Inputs .............................................................................. 17
Appendixes
Appendix A. Sensitivity Analysis .................................................................................................. 10
Appendix B. Derivation and Estimation of Tax Elasticities .......................................................... 13
Appendix C. Revenue-Maximizing Tax Rates .............................................................................. 15
Appendix D. Data Sources ............................................................................................................ 16
Appendix E. References to Empirical Studies in Table 4 .............................................................. 18
Contacts
Author Information........................................................................................................................ 18
Congressional Research Service
Boundaries on the Long-Run Realization Response to Changes in Capital Gains Taxes
Introduction
Capital gains occur when an asset increases in price, but capital gains are only taxed under the
income tax when the asset is sold and the gain is realized. A change in the capital gains tax rate
may produce smaller revenue effects than would be estimated by simply applying the tax rate
change to observed realizations. If individuals respond to a tax cut by realizing more gains or to a
tax increase by realizing fewer gains, this change in realizations can offset the static revenue
effects. At a certain tax rate, called the revenue-maximizing rate, a tax increase would reduce
revenues rather than increase them owing to the increase in realizations. The measure of the
realizations responses is an elasticity, the percentage change in realizations divided by the
percentage change in the tax rate.
Beginning in 1980, a series of statistical studies estimating the realizations response yielded a
wide range of behavioral responses, spanning elasticities of -0.27 to -3.80, providing little
guidance to the actual revenue gained or lost by a change in the tax rate. These estimates used
different approaches, including examining realizations and tax rates over time (time series),
comparing individuals with different tax rates and realizations in a single year (cross section), or
comparing individuals over time with changes in their tax rates (panel). These studies faced
challenges in separating transitory effects (effects of a temporary change in tax rates), short-term
effects (where there is a large stock of unrealized gains), and long-term or permanent elasticities
(changes in a steady state with a permanent tax change). Some of the large elasticities estimated
in these studies likely reflected a measure capturing transitional or short-run elasticities.
In 1991, CRS published a report aimed at measuring the limit to how large the elasticity could be.
Because gains cannot exceed accruals in the long term, this study used historical data on gains
relative to realizations to estimate this upper limit.1
Beginning in 1994, a number of additional statistical studies, addressing some previously raised
methodological issues, found a narrower range of estimates. However, the estimates still varied
widely, indicating that realizations responses could offset between 22% and 98% of the revenue
increase.2 Studies also had a wide range of revenue-maximizing tax rates, as high as 100% and as
low as 24%.3
This report updates CRS’s 1991 estimate of the bounds to capital gains realizations elasticities
using more recent data.
The Realization-to-Accruals Ratio
In the long run, the amount of capital gains realizations cannot exceed the amount of accruals. In
the extreme case, if every asset were sold every year, then realizations would be virtually equal to
accruals in each year. If this were currently the case, there could be no increased realizations in
response to a capital gains tax cut because there would be no potential source of the response. If,
however, some assets are never sold (or held until death, when the tax on gain is forgiven) or if
assets are sold less frequently than each year, then realizations will be less than accruals.
1 Limits to Capital Gains Feedback Effects, Congressional Research Service Report, Report 91-250 by Jane G,
Gravelle, March 15, 1991. This report can be found at https://www.policyarchive.org/handle/10207/20219.
2 Since the common semi-log functional form resulted in an elasticity that rose with the tax rate, this revenue offset
relates to a small change around the 22% tax rate.
3 See CRS Report R41364, Capital Gains Tax Options: Behavioral Responses and Revenues, by Jane G. Gravelle for a
review of these studies.
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Boundaries on the Long-Run Realization Response to Changes in Capital Gains Taxes
Realizations can then increase as a result of a tax cut, as individuals sell assets more frequently or
sell assets they would otherwise have held until death. This response is still limited by the amount
of unrealized accruals. Therefore, data on the ratio of realizations to accruals can provide some
bounds on the increase in realizations that might be expected from a capital gains tax cut.
Although realizations cannot exceed accruals on average, there are fluctuations from year to year
because the rate of appreciation does not remain constant each year. Therefore, it is important to
measure the ratio of realizations to accruals over a fairly long period of time. This report’s
analysis begins with data on revaluations of all individually held assets from the Federal
Reserve’s Financial Accounts of the United States (FA)4 and capital gains realizations for the
period 1987-2023 from tax returns.5
The revaluations from the FA include some assets that are not subject to capital gains, or to
negligible taxable capital gains. To arrive at accruals, the following assets were eliminated from
the FA: owner-occupied housing (structures and land), employer pension plans, life insurance,
earnings from individual retirement accounts, education saving accounts, and revaluations that
accrue to the nonprofit sector.6 Individual retirement accounts are included in other entries in the
revaluation data, largely in corporate equities, and the share of those in retirement accounts was
estimated using data from the Investment Company Institute.7 Revaluations in the nonprofit
sector were eliminated based on their share of included assets using FA balance sheets. In
addition, the revaluations exclude debt securities, which may have small gains or losses and are
relatively unimportant.
After excluding accruals that are not subject to capital gains taxes or subject to negligible capital
gains taxes, the ratio of realizations to accruals is 52.17%. An adjustment also needs to be made
for noncompliance, since some gains are not reported. Accruals were reduced by 15% to account
for noncompliance based on estimates using IRS data.8 Reducing accruals by 15% results in a
realization ratio of 61.374%.
Measuring Tax Rates and Transactions Costs
Placing boundaries on the long-run realization response requires accounting for federal and state
capital gains taxes, as well as transactions costs. Currently, the federal capital gains rate on long4 Board of Governors of the Federal Reserve System, “R.101 Change in Net Worth of Households and Nonprofit
Organization,” Financial Accounts of the United States, https://www.federalreserve.gov/releases/z1/20240607/html/
r101.htm.
5 Realizations from 1987 to 2014 are from U.S. Department of the Treasury, Office of Tax Analysis, “Taxes Paid on
Capital Gains for Returns with Positive Net Capital Gains: 1954-2014,” https://home.treasury.gov/policy-issues/taxpolicy/office-of-tax-analysis. Realizations from 2015 on are from Congressional Budget Office (CBO), “Budget and
Economic Data, Revenue Projections, by Category,” June 18, 2024 (supplement to An Update to the Budget and
Economic Outlook: 2024 to 2034), https://www.cbo.gov/data/budget-economic-data#7.
6 Board of Governors of the Federal Reserve System, Financial Accounts of the United States, “B.101.h Balance Sheet
of Households,” https://www.federalreserve.gov/releases/z1/preview/html/b101h.htm, and “B.101.n Balance Sheet of
Nonprofit Organizations,” https://www.federalreserve.gov/releases/z1/preview/html/b101n.htm.
7 Investment Company Institute, “Release: Quarterly Retirement Market Data,” The US Retirement Market, Table 19,
https://www.ici.org/statistical-report/ret_24_q3. The assets in Table 19 outside of money market assets and 75% of the
assets in “Other Assets” in Table 9, and adjusted for Section 529 savings plans, are excluded following the
methodology in Steven M. Rosenthal and Lydia S. Austin, “The Dwindling Taxable Share Of U.S. Corporate Stock,”
Tax Notes, May 16, 2016, pp. 923-932, https://www.urban.org/sites/default/files/publication/80621/2000790-TheDwindling-Taxable-Share-of-U.S.-Corporate-Stock.pdf.
8 Based on data for various years from Internal Revenue Service (IRS), “IRS: The Tax Gap,” https://www.irs.gov/
statistics/irs-the-tax-gap. The tax gap for capital gains varied, but tended to average around 15% for the years available.
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Boundaries on the Long-Run Realization Response to Changes in Capital Gains Taxes
term gains (which constitute most of gains) is 0%, 15%, or 20%, depending on the taxable
income of the taxpayer. Gains on assets held for less than a year are taxed at ordinary income tax
rates.9 Tax regimes have varied over the time period under consideration.10 From 1987 through
May 6, 1997, long-term capital gains were taxed at ordinary rates, but with a maximum rate of
28%. From May 7, 1997, to May 5, 2003, the maximum rate was 20%. From May 6, 2003,
through December 31, 2012, the maximum rate was 15%, and from January 1, 2013, to the
present, the maximum rate was 20%. Starting in 2013, high-income taxpayers also became
subject to a 3.8% tax on passive investment income, including capital gains, making the
maximum rate 23.8%.
The average combined income tax rate computed over the observation period is 23.6% (19.8%
federal and 3.8% state). The federal income tax rate is the average tax collected on realizations
based on Treasury Department and CBO data. It includes the 3.8% tax on net investment income.
This rate may be slightly understated because the marginal tax rate is higher than the average tax
rate. However, capital gains realizations are heavily concentrated in the top tax rate. The state
income tax rate is the maximum rate from the National Bureau of Economic Research TAXSIM
model.11
Transactions costs, like capital gains taxes, act as a barrier that makes selling assets more costly
and therefore need to be accounted for when estimating the realization response. Transactions
costs are relatively small for corporate equities, which are estimated to be 70% of the total
realizations.12 However, they are much larger for buildings (which constitute most noncorporate
assets). Because of the variability and uncertainty, several measures of transactions costs are
considered: 0.1%, 0.45%, and 1% for corporate stocks and mutual funds, and 3%, 6%, and 9% for
noncorporate equity.13
9 Carried interests must be held for three years to receive long-term capital gains treatment.
10 For a concise summary of the rates, see Tax Foundation, “Federal Capital Gains Tax Rates 1988-2011,”
https://files.taxfoundation.org/legacy/docs/fed_capgains_taxrates-20100830.pdf. For a narrative history, see CRS
Report R47113, Capital Gains Taxes: An Overview of the Issues, by Jane G. Gravelle.
11 National Bureau of Economic Research, “Maximum State Income Tax Rates 1977-2024,” TAXSIM,
https://taxsim.nber.org/state-rates/.
12 See CRS Report R47113, Capital Gains Taxes: An Overview of the Issues, by Jane G. Gravelle, for a discussion of
the share of capital gains by asset type.
13 These measures include the central tendency as indicated in the following discussions, along with larger and smaller
amounts to illustrate the sensitivity. Transactions costs in the stock market vary depending on the size of the trade and
the investor status. See Jeffrey A. Busse et al., Transaction Costs, Portfolio Characteristics, and Mutual Fund
Performance, October 2019, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2350583; Christopher Schwarz et al.,
The “Actual Retail Price” of Equity Trades, July 2023, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4189239;
BICCONI Students Investment Club, Modelling Transaction Costs and Market Impact, April 16, 2023, https://bsic.it/
modelling-transaction-costs-and-market-impact/; FREC, “Direct Indexing Transaction Costs,” January 15, 2025,
https://frec.com/resources/blog/direct-indexing-transaction-costs; Yuval Taylor, “The Transaction Costs of Trading
Stocks: A Primer for Retail Investors,” Portfolio 123 (blog) September 28, 2022, https://blog.portfolio123.com/thetransaction-costs-of-trading-stocks-a-primer-for-retail-investors/; Quick MBA, “Trading Costs,”
http://www.quickmba.com/finance/invest/tradecost/; Assurance Financial, “How to Estimate Closing Costs and What’s
Included,” https://assurancemortgage.com/what-are-closing-costs/#:~:text=
On%20average%2C%20most%20homebuyers%20will,are%20between%20$12%2C000%20and%20$30%2C000; Ira
Zlotowitz, “How Much Are Commercial Real Estate Closing Costs?,” Gparency, December 26, 2023,
https://gparency.com/blog/commercial-real-estate-closing-costs/; Taylor Wallace, “Fees For Selling a Business You
Might Not be Aware Of: Commission Rate,” Baton, March 15, 2023, https://www.batonmarket.com/resources/own/
fees-for-selling-a-business; BizBuySell, “How Much Does It Cost to Sell a Business?,” https://www.bizbuysell.com/
learning-center/article/cost-sell-business/#:~:text=
For%20most%20business%20owners%2C%20the,at%20the%20best%20possible%20terms.%E2%80%99.
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Boundaries on the Long-Run Realization Response to Changes in Capital Gains Taxes
Transactions costs are imposed on the entire sales price and not just the gain, so they must be
multiplied by the ratio of sales price to gains. These ratios are based on data reported by the IRS
for corporate and noncorporate equities: 4.5 for corporate stocks and 3.25 for noncorporate
equity.14
Estimating the Range of Realization Elasticities
The ratio of realizations to accruals and the tax rate can be translated into an elasticity given a
functional form of the realizations equation. The analysis in this report uses the semi-log
functional form that is used by both JCT and Treasury revenue estimators as well as recent
studies, in which econometric studies regress the natural logarithm of realizations on the tax rate.
A sensitivity analysis uses another functional form, constant net-of-tax rate elasticity, in which
econometric studies regress the logarithm of realizations on the logarithm of the net-of-tax rate
(one minus the sum of tax and transactions rates). The results of the sensitivity analysis are
reported in Appendix A. Both of the functional forms result in the elasticity rising with the tax
rate (see Appendix B).
Table 1 shows the estimated maximum elasticities evaluated at a 22% federal tax rate with
varying assumptions about transactions costs. For positive transactions costs, the estimated
maximum elasticity varies from -0.29 to -0.40 with an estimate at the midpoint of positive
transaction costs of -0.34. At a -0.34 elasticity, the revenue-maximizing tax rate would be 65%.15
The share of revenue offset by the realizations response corresponds to the elasticity, 34%. Table
1 also reports estimates if there are no transactions costs, with a maximum elasticity of -0.45.
Table 1. Maximum Capital Gains Elasticity at a 22% Federal Tax Rate, Assuming
100% of Accruals Are Realized,Various Transactions Costs
Noncorporate
Assets
Corporate Stock and Mutual Funds
Transactions Costs
0.0%
0.01%
0.45%
1.0%
0.0%
-0.45
-0.45
-0.43
-0.40
3.0%
-0.40
-0.40
-0.38
-0.36
6.0%
-0.36
-0.36
-0.34
-0.32
9.0%
-0.32
-0.32
-0.31
-0.29
Source: CRS calculations.
Note: Estimates were made using the semi-log functional form. Assumes 15% noncompliance and a realization
ratio in the absence of transactions costs and taxes (𝑟 ∗ ), of 1. See Appendix B for more information.
14 Janette Wilson and Christopher Williams, “Sales of Capital Assets Data Reported on Individual Tax Returns, Tax
Years 2013-2015,” IRS, Statistics of Income Bulletin, Winter 2022, https://www.irs.gov/pub/irs-soi/soi-a-socaid2205.pdf.
15 The revenue-maximizing tax rate is 0.22 divided by the absolute value of the elasticity. See Appendix C. Note that
the revenue-maximizing tax rate measures the rate applied to taxpayers and all gains would be taxed at the same rate. If
only the top rate of 20% were increased to maximize revenues, the revenue-maximizing tax rate would be lower
because some of the tax is generated at the lower rate of 15% and revenues would not increase for that share of gains.
Data from Tim Dowd and Zach Richards, Contextualizing Elasticities for Policymaking: Capital Gains and RevenueMaximizing Tax Rates, February 2021, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3767121, indicate that of
gains in the adjusted gross income bracket of $500,000 or more where most gains are subject to the top rate, 77% are
taxed at the 20% rate. This estimate indicates that the revenue-maximizing top rate would be 77% times 65%, or 50%.
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Boundaries on the Long-Run Realization Response to Changes in Capital Gains Taxes
The elasticities reported in Table 1 assume that in the absence of transaction costs and taxes, all
gains would be realized every year, as investors would prefer to receive income in the present
rather than the future. This assumption is almost certainly too high, as there are numerous reasons
aside from costs of trading that would cause individuals to retain assets. There are nonpecuniary
costs to trading assets, as such trades require some time and attention by the seller. In addition,
individuals are likely to be satisfied with the experienced and anticipated gains made in all or
some of their portfolios, perhaps indefinitely. Some assets are part of family businesses and
would be retained for those reasons. Even for corporate stock, founders, even of very large
corporations, own significant shares of stock and may plan to pass those shares to their
descendants. In addition, some individuals donate appreciated assets to charitable organizations
(either in life or at death), and those gains would never be realized.
If instead of all gains being realized annually in the absence of taxes and transactions costs, only
80% would be realized (approximately the midpoint of possible responses, given that the
observed accrual to realization ratio with tax is 0.64), the maximum elasticity ranges from -0.22
to -0.16 for positive transactions costs, with an estimate at the midpoint of positive transactions
costs of -0.19. The revenue-maximizing tax rate at these elasticities would be over 100%.16 The
revenue offset would be 19%. The maximum elasticity with no transactions costs is -0.25.
Table 2. Maximum Capital Gains Elasticity at a 22% Federal Tax Rate, Assuming 80%
of Accruals Realized, Various Transactions Costs
Corporate Stock and Mutual Funds
Noncorporate
Assets
Transaction Costs
0.0%
0.01%
0.45%
1.0%
0.0%
-0.25
-0.24
-0.23
-0.22
3.0%
-0.22
-0.22
-0.21
-0.19
6.0%
-0.20
-0.19
-0.19
-0.17
9.0%
-0.18
-0.17
-0.17
-0.16
Source: CRS calculations.
Note: Estimates were made using the semi-log functional form. Assumes 15% noncompliance and a realization
ratio in the absence of transactions costs and taxes, 𝑟 ∗ , of 0.8. See Appendix B for more information.
The results presented in Table 1 and Table 2 assumed a noncompliance rate of 15%. The degree
of noncompliance, however, is challenging to measure. Table 3 provides a sensitivity analysis
that considers the effects of larger (20%) or smaller (10%) noncompliance rates, assuming the
midpoint transactions costs. It also reports results at a 0% noncompliance rate. The maximum
elasticity with 100% of accruals realized ranges from -0.38 to -0.30. The elasticity assuming a
limit of 80% of accruals ranges from -0.23 to -0.14. The elasticity with full compliance is -0.46
and -0.30.
16 Nothing precludes a revenue-maximizing rate in excess of 100% since saving is the only way to transfer purchasing
power across time, regardless of the rate of return. The after-tax real rate of return on savings has been negative in the
past.
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Table 3. Effects of Varying Noncompliance Rates Assuming the Midpoint
Transactions Costs
Noncompliance Rate
Maximum Elasticity with 100%
of Accruals Realized
Maximum Elasticity With 80%
of Accruals Realized
0%
-0.46
-0.30
10%
-0.38
-0.23
15%
-0.34
-0.19
20%
-0.30
-0.14
Source: CRS calculations.
Note: Estimates made using semi-log functional form. Assumes corporate stock and mutual funds transactions
costs of 0.45% and noncorporate equity transactions costs of 6.0%. See Appendix A for more information.
The Relationship of the Limits to Econometric
Estimates and Revenue-Estimating Practices
The results of the basic simulations (Table 1) indicate that the maximum elasticity ranges from 0.40 to -0.29 at a 22% federal tax rate for the range of positive transactions costs considered; the
value at the midpoint of these costs is -0.34. In reality, all accruals are unlikely to be realized in a
year, as assumed in that model. Therefore, an elasticity of -0.19 that is based on the assumption of
a realization ratio in the absence of transactions costs and taxes equal to 0.8 and at the midpoint
of transactions costs might be a more reasonable estimate (Table 2). The following examines how
the results presented in Table 1 and Table 2 compare to those from econometric studies and to
estimates used by revenue estimators.
Econometric Estimates
Because of various methodologies, this report focuses on the more recent studies that have been
published beginning in the mid-1990s that avoided some of the methodological problems that
caused the confounding of transitory, short-term, and permanent elasticities in older studies.17 It
also focuses on panel studies, which follow individuals over a period of time, as these are
generally recognized as the best approach to uncovering the permanent elasticity. (Panel studies
can be problematic if the panels are too short, however.)
Table 4 lists the panel studies that began in the mid-1990s, arrayed by elasticities from smaller to
larger, all evaluated at a 22% tax rate. These studies still reveal a broad range of elasticity
estimates (and revenue offset) from a tax rate change, ranging from 22% to 90%. Of the eight
studies, five exceed the maximum elasticity at the midpoint of transactions costs and
noncompliance estimated in this study (-0.34).
17 These older studies are discussed in the Appendix to CRS Report R41364, Capital Gains Tax Options: Behavioral
Responses and Revenues, by Jane G. Gravelle.
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Table 4. Recent Panel Estimates of Realizations Response
Coefficient
Elasticity at 22% Rate
Revenue-Maximizing
Tax Rate
Burman and Randolph
(1994)
1.0*
-0.22
100%
Auerbach and Siegel
(2000)
1.36
-0.30
0.73%
Agersnap and Zidar
(2020)
1.4
-0.31
71%
Bogart and Gentry
(2000)
2.5
-0.55
40%
Bakija and Gentry (2014)
2.91
-0.64
34%
Dowd and McClelland
(2024)
3.2
-0.71
31%
Auten and Joulfaian
(2004)
3.6
-0.79
28%
Dowd, McClelland, and
Muthitacharoen (2015)
4.48
-0.98
22%
Study
Source: For references, see Appendix C. For brief comments on these studies, see CRS Report R41364, Capital
Gains Tax Options: Behavioral Responses and Revenues, by Jane G. Gravelle.
Notes: An * indicates that the estimate was not statistically significant. The estimates have been adjusted to
conform to the 22% tax rate and may be different from those reported by the authors. The coefficient is the
fixed estimate from a semi-log function that, multiplied by the tax rate, yields the elasticity. That is, if the
regression is of the form: log gain = a + bt + other regressors, and t is the tax rate, the coefficient is b. It is
expected to be negative but is reported as an absolute value. Note that the Agersnap-Zidar basic regression was
in a log gains = a +b log(1-t) + other regressors, but they also reported results with a semi-log function. A longterm estimate was not provided, but an estimate of b of 3.05 for years 6-8 and 2.39 for years 6-10 indicates an
estimate of 1.4 for years 9 and 10. At a 22% rate, their elasticity was -0.19 with their preferred functional form.
As noted in the text, Dowd and McClelland (2024) in a subsequent paper corrected an error in the code used in
Dowd, McClelland, and Muthitacharoen (2015) which resulted in a revised elasticity of -0.78 compared to -0.72
reported in the original 2015 study. It is the revised results that are reported in Table 4 for Dowd, McClelland,
and Muthitacharoen (2015).
Why do these studies often find elasticities that appear larger than the maximum feasible
elasticity presented in this report? One possibility, of course, is that the functional form used in
this analysis does not track the pattern of realizations. However, it is notable that the other
functional form sometimes used, the net-of-tax elasticity, produces similar estimates of the
maximum rate (-0.42 as compared to -0.34 for the semi-log form) for the midpoint of positive
transactions cost (see Appendix A).
It is more likely that studies with higher elasticities are capturing the transitory elasticity. These
effects occur when individuals time their realizations to occur when their tax rates are temporarily
low. Notably, the first two studies that found lower elasticities than the estimated maximum relied
on variation in state tax rates to identify the permanent elasticity. The Agersnap and Zidar study
used total tax rates with year-fixed effects to control for the federal tax rate.18 All three studies
used tax data. The Agersnap and Zidar study also has a fairly long measure of response (covering
up to 10 years), and the elasticity fell over time. The next two studies, which found elasticities of
18 Using year-fixed effects does not solely rely on state tax rates, but controls for changes in federal tax rates through
tax changes over time. It does not control for variations in tax rate for an observation when tax rates are not changing
through legislation.
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-0.55 and -0.64, did not have direct access to tax data, but they used the state tax variation by
including year-fixed effects.
The last two studies with the highest elasticities used federal tax rates and generally had short
lags, which suggests it is difficult to isolate the permanent elasticity. Also, when the Auerbach and
Siegel study added a variable in an alternative specification that included the federal rate, the
elasticity was five times larger. That result suggests that while the state variation reflects
permanent differences, the variation in realizations with the federal rate reflects transitory effects.
And while transitory or very short-run effects can have some policy relevance—for instance, if
evaluating the potential ramifications of a temporary capital gains tax decrease to mitigate a
severe economic shock—the long-run elasticity is typically of interest to policymakers when
considering permanent changes.
Subsequent to the Dowd, McClelland, and Muthitacharoen study, McClelland and Dowd returned
to their data source and provided some estimates with additional lags and additional years.19
Adding lags and years reduced the estimated elasticity, but the elasticities still exceeded the
maximum elasticity estimated in this study for positive transactions costs.
Some econometric studies use time series estimation, which estimates how realizations changed
with the tax rate over time. These estimates largely pick up short-run responses, which are
generally expected to be larger than permanent responses. These short-run responses can be
asymmetric as well, since larger short-run effects are more likely to be associated with reductions
in tax rates than with increases, where there is an accumulated stock of unrealized gains. Time
series studies also face the challenges of controlling for other variables in the economy that affect
realizations, such as stock market prices, business cycles, and real estate prices. Such studies,
however, have not produced the large elasticities associated with pre-1994 panel and cross section
studies that could not control for transitory effects, and time series studies have exhibited similar
ranges of elasticities (between -0.27 and -0.89) from the initial studies to present day, although all
have not used the semi-log functional form or were evaluated at the same tax rate. Those recent
studies have had a range of elasticities from -0.47 to -0.75.20
Revenue-Estimating Practices
The official revenue estimator for tax legislation, the Joint Committee on Taxation (JCT), has
used a coefficient of 3.1 for the permanent elasticity, corresponding to a -0.68 elasticity at a 22%
rate for estimates of capital gains revenue effects.21 This estimate is well above the maximum
elasticities estimated in this study and above all but two of the recent panel studies shown in
Table 4. The Treasury Department uses a slightly higher estimate of 0.72.22 The elasticities
19
See Tim Dowd and Robert McClelland, The Sensitivity of the Tax Elasticity of Capital Gains to Lagged Tax Rates
and Migration, Tax Policy Center, May 2024, https://taxpolicycenter.org/sites/default/files/publication/165863/
the_sensitivity_of_the_tax_elasticity_of_capital_gains_to_lagged_tax_rates_and_migration.pdf. These estimates reflect
three different effects: adding lags, using a data set with more years which would raise the mean tax rate, probably by
about 3%. However, the reported elasticity without lags was 0.75 so adjusting for both would result in a rate at a 22%
tax rate of 0.87. So the lowest rate they estimated with three lags would be -0.50.
20 See CRS Report R41364, Capital Gains Tax Options: Behavioral Responses and Revenues, by Jane G. Gravelle for a
review.
21 The Joint Committee on Taxation does not regularly report its elasticities in general, and the coefficient was supplied
by the committee and used in CRS Report R41364, Capital Gains Tax Options: Behavioral Responses and Revenues,
by Jane G. Gravelle.
22 CRS Report R41364, Capital Gains Tax Options: Behavioral Responses and Revenues, by Jane G. Gravelle. This
elasticity was supplied to the author by the Treasury Department.
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reported in 1990 were -0.76 for JCT and-0.98 for Treasury, although at an unspecified tax rate.23
These elasticities were chosen at a time when panel and cross section studies were reporting
widely varying estimates, ranging from -0.55 to -3.8. The original JCT estimate was based on the
time series studies and was approximately in the middle of the studies.24 Also, at that time, the top
tax rate was higher than in subsequent years.
CBO uses elasticities for forecasting rather than revenue estimating and relies on time series. Its
current elasticity is -0.46.25
The bounds on the capital gains realization response based on the observed ratios of realizations
to accruals and tax rates indicate a smaller response than that estimated in some statistical studies
and smaller than that used in recent estimates of the capital gains response.
23 These are elasticities before portfolio responses, and are reported in CRS Report 90-161 RCO, Can a Capital Gains
Tax Cut Pay For Itself? by Jane G. Gravelle, March 23, 1990, available to congressional clients on request.
24 See JCT, Explanation of Methodology Used To Estimate proposals Affecting the Taxation of Income From Capital
Gains, Joint Committee Print, March 27, 1990, https://www.jct.gov/publications/1990/jcs-12-90.
25 Based on conversations with CBO and adjusted by CRS to conform to a 22% tax rate.
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Appendix A. Sensitivity Analysis
This appendix reports a sensitivity analysis, which considers the choice of functional form and
other modeling assumptions by seeing how the results change when alternatives are selected.
A Constant Net-Of-Tax Elasticity
Table A-1 reports the results of using the alternative functional form, a constant elasticity with
respect to the net-of-tax return (see Appendix B). Both functions have similar shapes with
realizations first declining slowly and then more quickly (so that the elasticity rises with the tax
rate) before rising dramatically at very high tax rates. The semi-log approach seems more realistic
because, unlike the constant net-of tax-elasticity, the elasticity does not approach infinity and
realizations do not approach zero as the tax rate approaches 100%. People would still sell assets
with a 100% tax rate (just as they sell assets with losses), and people save when the real interest
rate is negative due to inflation because since the only way to use current resources for future
consumption is to save, even if the return is negative.26
The elasticity with positive transactions costs ranges from -0.48 to -0.36 with an estimate at the
midpoint of transaction costs of -0.42. The revenue-maximizing tax rate for this elasticity is lower
than using a semi-log functional form, 40%.27 The revenue offset is 42%.
Table A-1. Maximum Capital Gains Elasticity at a 22% Federal Tax Rate, Assuming
100% of Accruals Are Realized,Various Transactions Costs, Constant Net-of-Tax
Elasticity
Noncorporate
Corporate Stock and Mutual Funds
Transactions
Costs:
0.0%
0.01%
0.45%
1.0%
0.0%
-0.54
-0.53
-0.51
-0.48
3.0%
-0.48
-0.48
-0.46
-0.44
6.0%
-0.44
-0.43
-0.42
-0.40
9.0%
-0.40
-0.40
-0.38
-0.36
Source: CRS calculations.
Notes: Noncorporate transactions costs are listed in the first column, rows two through five, and corporate
stock and mutual funds transactions costs are listed in the first row, columns two through give. Estimates are
made using semi-log functional form. Assumes 15% noncompliance and a realization ratio in the absence of
transactions costs and taxes, 𝑟 ∗ , of 1.0. See Appendix B for more information.
Table A-2 shows the same elasticities under the assumption that maximum realizations will be
80% of accruals. The elasticities range from -0.26 to -0.20, with an estimate at the midpoint of
transactions costs of -0.23. The revenue-maximizing tax rate at the midpoint is 54%.
26 Two other functional forms were used in earlier studies, but each presents difficulties in the pattern of realizations. A
linear form crosses the y and x axis. Thus, for example, it can cause realizations to become negative at some higher tax
rate. Because a constant elasticity with respect to the tax rate asymptotically approaches infinity on the y axis and zero
on the x axis, it can cause realizations to continue well beyond a 100% tax rate.
27 The revenue-maximizing tax rate is [(1-t )*0.22]/(.22 + E*(1-t -0.22)] where t is the state tax rate and E is the
s
s
s
estimated elasticity.
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Table A-2. Maximum Capital Gains Elasticity at a 22% Federal Tax Rate, Assuming
80% of Accruals Are Realized, Various Transactions Costs, Constant Net-of-Tax
Elasticity
Noncorporate
Corporate Stock and Mutual Funds
Transactions Costs:
0.0%
0.01%
0.45%
1.0%
0.0%
-0.29
-0.29
-0.28
-0.26
3.0%
-0.26
-0.26
-0.25
-0.24
6.0%
-0.24
-0.24
-0.23
-0.21
9.0%
-0.22
-0.22
-0.21
-0.20
Source: CRS calculations.
Notes: Noncorporate transactions costs are listed in the first column, rows two through five, and corporate
stock and mutual funds transactions costs are listed in the first row, columns two through give. Estimates are
made using semi-log functional form. Assumes 15% noncompliance and a realization ratio in the absence of
transactions costs and taxes, 𝑟 ∗ , of 0.8. See Appendix B for more information.
Table A-3 shows the effects of different assumptions about compliance costs. The maximum
elasticity ranges from -0.47 to -0.37. The elasticity with a maximum realization of 80% of
accruals ranges from -0.28 to -0.18.
Table A-3. Effects of Varying Noncompliance Rates Assuming the Midpoint
Transactions Costs, Constant Net-of-Tax Elasticity
Elasticity with 100% of Accruals
Realized
Elasticity With 80% of Accruals
Realized
0%
-0.56
-0.37
10%
-0.47
-0.28
15%
-0.42
-0.23
20%
-0.37
-0.18
Noncompliance Rate
Source: CRS calculations.
Note: Assumes corporate stock and mutual funds transactions costs of 0.45% and noncorporate equity
transactions costs of 6.0%. See Appendix B for more information.
Alternative Limits on Maximum Realizations, Basic (Semi-log)
Equation
Table A-4 shows how elasticities vary depending on the assumption of the maximum realizations
as a percentage of accruals for the lowest, midpoint, and highest transactions costs. This
assumption has the largest effect on the elasticity.
Table A-4. Elasticities by Maximum Realizations As a Percentage of Accruals
Limit on Realizations
Low Transactions
Costs
Midpoint Transactions
Costs
High Transactions
Costs
70%
-0.11
-0.09
-0.08
80%
-0.22
-0.19
-0.16
90%
-0.31
-0.27
-0.23
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Limit on Realizations
Low Transactions
Costs
Midpoint Transactions
Costs
High Transactions
Costs
100%
-0.40
-0.34
-0.29
Source: CRS calculations.
Notes: Assumes 15% noncompliance and a realization ratio of 1.0 in the absence of transactions costs and taxes.
See Appendix B for more information.
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Appendix B. Derivation and Estimation of Tax
Elasticities
Semi-Log Functional Form
The semi-log functional form used to calculate the feedback effect of a capital gains tax reduction
is:
𝑅 = 𝐵𝑒 −𝑏𝑘
(1)
where:
•
𝑅 is the amount of realizations;
•
•
𝐵 and 𝑏 are constants;
𝑘 is the sum of transactions costs (𝑐) and combined state capital gains tax (𝑡𝑠 )
and federal capital gains tax (𝑡𝑓 ), or 𝑘 = 𝑐 + 𝑡(1 − 𝑐) where 𝑡 = 𝑡𝑠 + 𝑡𝑓 , and
•
𝑒 is the mathematical constant.
Thus, the semi-log functional form can be expressed as:
𝑅 = 𝐵𝑒 −𝑏(𝑐+𝑡(1−𝑐))
(2)
This can be used to determine the formula for the elasticity of realizations with respect to the
federal capital gains tax rate, which is the percentage change in realizations over the percentage
change in the capital gains tax rate. Start by computing the differential of 𝑅 in equations (2):
𝑑𝑅 = −𝐵𝑏(1 − 𝑐)𝑒 −𝑏(𝑐+𝑡(1−𝑐)) 𝑑𝑡𝑓
(3)
Dividing (3) by (2) gives the percentage change in realizations (𝑅) as:
𝑑𝑅
= −𝑏(1 − 𝑐)𝑑𝑡𝑓
𝑅
To obtain the elasticity with respect to 𝑡𝑓 , multiply the right-hand side of (4) by 𝑡𝑓 over 𝑡𝑓 .
𝑡𝑓
𝑑𝑅
= −𝑏(1 − 𝑐)𝑑𝑡𝑓
𝑅
𝑡𝑓
(4)
(5)
Rearranging to get the percentage change in 𝑅 over the percentage change in 𝑡 produces the
elasticity of realizations with respect to 𝑡𝑓 :
𝜀𝑡𝑓 = 𝑏(1 − 𝑐)𝑡𝑓
(6)
Using this formula requires determining values for 𝑏 and 𝑐. Transactions costs (𝑐) are difficult to
pin down, so the analysis presented in this report assumed a range of values as discussed in
Appendix D. The constant 𝑏 can be expressed as a function of estimated and assumed values by
noting that realizations can also be expressed as a fraction of accruals:
𝑅 = 𝑟𝐴
(7)
where 𝑟 is the ratio of realizations to accruals and 𝐴 is accruals.
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Let 𝑟 ∗ be defined as the ratio of realizations to accruals when the capital gains tax and
transactions costs are zero (i.e., 𝑘 = 0). Using this definition along with (1) and (2) allows the
ratio 𝑟/𝑟 ∗ to be expressed as:
𝑟
(8)
= 𝑒 −𝑏𝑘
𝑟∗
This equation can be solved for the constant 𝑏 by taking the natural logarithm of both sides:
1
𝑟
𝑏 = − ln ( ∗ )
𝑘
𝑟
(9)
The ratio of realization to accruals (𝑟) was estimated from the data as explained below. The ratio
of realizations to accruals (𝑟 ∗ ) when the capital gains tax and transactions costs are zero is
bounded between 𝑟 and 1.0. The analysis in this report allowed 𝑟 ∗ to vary by a tenth of a percent
within those bounds. The sum of transactions costs and state and federal capital gains tax rates
(𝑘) was set partly by assumption and partly by using estimates from the data as explained below.
Constant Net-of-Tax Elasticity Functional Form
The constant net-of-tax elasticity functional form used to calculate the feedback effect of a capital
gains tax reduction is:
𝑅 = 𝐵(1 − 𝑘)𝑏
(10)
where:
•
•
•
𝑅 is the amount of realizations;
𝐵 and 𝑏 are constants;
𝑘 is the sum of transactions costs (𝑐) and combined state capital gains tax (𝑡𝑠 )
and federal capital gains tax (𝑡𝑓 ), or 𝑘 = 𝑐 + 𝑡(1 − 𝑐) where 𝑡 = 𝑡𝑠 + 𝑡𝑓 .
Following the same steps explained above for the semi-log elasticity produces the elasticity:
𝜀𝑡𝑓 = −
𝑏𝑡𝑓
(1 − 𝑡)
(11)
where 𝑏 is given by:
𝑏=
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1
𝑟
ln ( ∗ )
ln(1 − 𝑘)
𝑟
(12)
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Appendix C. Revenue-Maximizing Tax Rates
The revenue-maximizing capital gains tax rate can be estimated using the functional forms
reviewed in Appendix B.
Semi-Log Functional Form
Federal capital gains tax revenues (𝑇𝑎𝑥𝑅𝑒𝑣) are equal to the federal capital gains tax rate (𝑡𝑓 )
multiplied by realizations (𝑅). Using equation (2), this can be written as:
𝑇𝑎𝑥𝑅𝑒𝑣 = 𝑡𝑓 𝐵𝑒 −𝑏(𝑐+𝑡(1−𝑐))
(13)
where 𝑡 is the combined federal capital gains tax (𝑡𝑓 ) and state capital gains tax (𝑡𝑓 ).
Taking the natural log and differentiating with respect to 𝑡𝑓 produces:
𝑑 ln(𝑇𝑎𝑥𝑅𝑒𝑣) 1
= − 𝑏(1 − 𝑐)
𝑑𝑡𝑓
𝑡𝑓
(14)
Setting (14) equal to zero and denoting the revenue-maximizing tax rate as 𝑡𝑓∗ gives:
𝑡𝑓∗ =
1
𝑏(1 − 𝑐)
(15)
Multiplying the right-hand side by 𝑡𝑓 over 𝑡𝑓 and using equation (6) allows the revenuemaximizing tax rate to be expressed as a function of the tax elasticity 𝜀𝑡
𝑡𝑓
𝑡𝑓∗ =
𝜀𝑡𝑓
(16)
Constant Net-of-Tax Elasticity Functional Form
Using equation (10) and substituting in 𝑘 = 𝑐 + 𝑡(1 − 𝑐), federal capital gains tax revenues can
be written as:
𝑇𝑎𝑥𝑅𝑒𝑣 = 𝑡𝑓 𝐵[1 − (𝑐 + 𝑡(1 − 𝑐))]
𝑏
(17)
where, again, 𝑡 is the combined federal capital gains tax (𝑡𝑓 ) and state capital gains tax (𝑡𝑠 ).
Differentiating with respect to 𝑡𝑓 produces:
𝑑𝑇𝑎𝑥𝑅𝑒𝑣
𝑏
𝑏−1
= 𝐵[1 − (𝑐 + 𝑡(1 − 𝑐))] − 𝑡𝑓 𝑏𝐵(1 − 𝑐)[1 − (𝑐 + 𝑡(1 − 𝑐))]
𝑑𝑡𝑓
(18)
Setting (18) equal to zero and denoting the federal revenue-maximizing tax rate as 𝑡𝑓∗ gives:
𝑡𝑓∗ =
1 − 𝑡𝑠
1+𝑏
(19)
Solving equation (11) for 𝑏 and substituting into equation (19) allows the revenue-maximizing tax
rate to be expressed as a function of the tax elasticity:
𝑡𝑓∗ =
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(1 − 𝑡𝑠 )𝑡𝑓
𝑡𝑓 − 𝜀𝑡𝑓 (1 − 𝑡𝑠 − 𝑡𝑓 )
(20)
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Appendix D. Data Sources
The period of study in this report was 1987 to 2023. Accrued capital gains were obtained from the
Board of Governors of the Federal Reserve System, Financial Accounts, R.101 Change in Net
Worth of Households and Nonprofit Organizations.28 These data were adjusted to isolate
household equities and mutual funds using B.101.h Balance Sheet of Households and B.101.n
Balance Sheet of Nonprofit Organizations.29 Education saving accounts (e.g., 529s) were
removed using data on such accounts listed in the memo to B.10.1. Individual retirement accounts
were removed using estimates from the Investment Company Institute.30
Realized capital gains from 1987 to 1994 were obtained from Treasury, Office of Tax Analysis.31
Realized capital gains from 1995 to 2023 were obtained from the Congressional Budget Office
(CBO).32
Federal capital gains tax rates were computed as capital gains tax receipts over realizations as
reported by Treasury and CBO. State capital gains tax rates were obtained from the NBER
TAXSIM.33 An average effective combined capital gains tax rate was computed by weighting
federal and state taxes by realizations.
Tax noncompliance impacts the potential response to a capital gains tax reduction. This analysis
assumed four different rates of noncompliance: 0%, 10%, 15%, and 20%.34
Estimates of transactions costs vary across studies and depend on how costs are measured. Due to
the variation in the literature, this analysis assumed a range of transactions costs for corporate and
noncorporate equity separately.
Transactions costs are generally measured as a share of the total asset’s sales price. The above
cost figures were increased by a multiple to reflect costs as a share of the realized gain. The
multiple for corporate equity was 4.5 and the multiple for noncorporate equity was 3.25, as
determined using IRS Statistics of Income data on gain over sales price.35 Noncorporate equity
28 Board of Governors of the Federal Reserve System, “R.101 Change in Net Worth of Households and Nonprofit
Organizations,” Financial Accounts of the United States, https://www.federalreserve.gov/releases/z1/20240607/html/
r101.htm.
29 Board of Governors of the Federal Reserve System, “B.101.h Balance Sheet of Households,” Financial Accounts of
the United States, https://www.federalreserve.gov/releases/z1/preview/html/b101h.htm, and “B.101.n Balance Sheet of
Nonprofit Organizations,” https://www.federalreserve.gov/releases/z1/preview/html/b101n.htm.
30 Investment Company Institute, “Release: Quarterly Retirement Market Data,” The US Retirement Market, Table 19,
https://www.ici.org/statistical-report/ret_24_q3. The assets in Table 19 outside of money market assets and 75% of the
assets in “Other Assets” in Table 9, and adjusted for Section 529 savings plans, are excluded following the
methodology in Steven M. Rosenthal and Lydia S. Austin, “The Dwindling Taxable Share Of U.S. Corporate Stock,”
Tax Notes, May 16, 2016, pp. 923-932, https://www.urban.org/sites/default/files/publication/80621/2000790-TheDwindling-Taxable-Share-of-U.S.-Corporate-Stock.pdf.
31 U.S. Department of the Treasury, Office of Tax Analysis, “Taxes Paid on Capital Gains for Returns with Positive
Net Capital Gains: 1954-2014,” https://home.treasury.gov/policy-issues/tax-policy/office-of-tax-analysis.
32 CBO, “Budget and Economic Data, Revenue Projections, by Category,” June 18, 2024 (supplement to An Update to
the Budget and Economic Outlook: 2024 to 2034), https://www.cbo.gov/data/budget-economic-data#7.
33 National Bureau of Economic Research, “Maximum State Income Tax Rates 1977-2024,” TAXSIM,
https://taxsim.nber.org/state-rates/.
34 Based on data for various years from IRS, “IRS: The Tax Gap,” https://www.irs.gov/statistics/irs-the-tax-gap. The
tax gap varied, but tended to average around 15% for the years available.
35 Janette Wilson and Christopher Williams, Sales of Capital Assets Data Reported on Individual Tax Returns, Tax
Years 2013-2015, IRS, Statistics of Income Bulletin, Winter 2022, Table 1A, https://www.irs.gov/pub/irs-soi/soi-asoca-id2205.pdf.
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includes residential rental property, depreciable business real property, farmland, and other land.
A previous CRS study found that corporate stock accounted for 67.9% of long-term capital gains
(associated with stocks held directly and indirectly through pass-throughs). The analysis
presented in this report assumed corporate equity accounts for 70% of long-term capital gains, in
line with the previous finding.
The data sources summarized above produced the parameter estimates shown in Table D-1.
Table D-1. Elasticity Model Parameter Inputs
Parameter
Value
Realization ratio (𝑟)
0.614
Federal capital gains tax rate (𝑡 𝑓 )
0.1918
State capital gains tax rate (𝑡 𝑠 )
0.0380
Transactions costs:
Corporate equity
0.0, 0.0010, 0.0045, 0.010
Noncorporate equity
0.0, 0.03, 0.06, 0.09
Transactions cost multiple:
Corporate equity
4.5
Noncorporate equity
3.25
Share of long-term gains attributable to corporate stock
0.70
Noncompliance rate
0.0, 0.10, 0.15, 0.20
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Appendix E. References to Empirical Studies in
Table 4
Agersnap, Ole and Owen Zidar, “The Tax Elasticity of Capital Gains and Revenue-Maximizing
Rates,” American Economic Review: Insights, vol. 3. no. 4 (December 2021), pp. 399-416.
Auerbach, Alan J. and Jonathan M. Siegel, “Capital-Gains Realizations of the Rich and
Sophisticated,” American Economic Review, vol. 90 (May 2000), pp. 276-282.
Auten, Gerald and David Joulfaian, “Taxes and Capital Gains Realizations: Evidence from a
Long Panel,” Prepared for Presentation at the Society of Government Economists session at the
Allied Social Science Association Meetings, January 8, 2005, paper dated December 2004.
Bakija, Jon M. and William M. Gentry, Capital Gains Realizations: Evidence from a Long Panel
of State-Level Data, Working Paper, Williams College, June 2014, https://web.williams.edu/
Economics/wp/BakijaGentryCapitalGainsStatePanel.pdf.
Bogart, William T. and William M. Gentry, “Capital Gains Taxes and Realizations: Evidence from
Interstate Comparisons,” Review of Economics and Statistics, vol. 77 (May 1995), pp. 267-282.
Burman, Leonard E. and William C. Randolph, “Measuring Permanent Responses to Capital
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Author Information
Mark P. Keightley
Specialist in Economics
Congressional Research Service
Jane G. Gravelle
Senior Specialist in Economic Policy
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Boundaries on the Long-Run Realization Response to Changes in Capital Gains Taxes
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R48562 · VERSION 1 · NEW
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