Capital Gains Tax Options: Behavioral Responses and Revenues




Capital Gains Tax Options: Behavioral
Responses and Revenues

Updated January 19, 2021
Congressional Research Service
https://crsreports.congress.gov
R41364




Capital Gains Tax Options: Behavioral Responses and Revenues

Summary
Compared with most other tax provisions, the potential revenue gain scored for an increase in
capital gains taxes is strongly affected by behavioral responses assumed by the Joint Committee
on Taxation (JCT) and the Department of the Treasury. As an il ustration, the Obama
Administration estimated in February 2010 that al owing the Bush tax cuts for capital gains to
expire would have raised $16 bil ion of revenue in FY2019. Yet, based on Congressional Budget
Office (CBO) projections in January 2010, the current effective capital gains tax was 13.3% in
2008 and would have increased to 17.9% in 2019; applying the differential in these rates to the
realizations in 2019 would have produced a revenue difference of $40 bil ion. Although some of
this differential could arise from different forecasts, assumptions about behavioral responses are
the main reason for the reduction in projected revenues.
Because these behavioral responses limit the potential revenue scored from a tax increase on
capital gains and because of concerns that most income of very high-income individuals is in the
form of capital gains (whether accrued or realized), proposals have been advanced to tax capital
gains currently (as accrued) by marking to market publicly traded securities and imposing a look-
back tax on difficult-to-value assets. Such a change faces a number of difficulties; thus it is
important to understand the evidence of the behavioral responses. The analysis in this study
suggests the Administration’s projections and those of the JCT, absent a change in their
realizations response, may understate revenue gains from increasing capital gains tax rates.
Realizations responses in revenue projections by the revenue-estimating agencies (Joint
Committee on Taxation and the Treasury) were publicly discussed at the end of the 1980s, in the
midst of a contentious debate. The larger the absolute value of the elasticity (the percentage
change in realizations divided by the percentage change in taxes), the smal er the revenue gain;
with elasticities larger than one in absolute value, a loss would occur. Estimated elasticities in the
literature prior to 1990 ranged from 0.3 to almost 3.8, leaving limited guidance for revenue-
estimating agencies. JCT used an elasticity of 0.76, whereas Treasury used an elasticity of one.
At the time, concerns were raised that there were serious problems with this evidence. Perhaps
the most significant concern was that larger results from studies of individuals reflected a timing
or transitory response (high-income taxpayers with variable income chose to realize gains when
tax rates were temporarily low). This transitory response is not appropriate for assessing a
permanent change.
Evidence and studies since that time suggest the permanent elasticity is considerably lower than it
appeared in 1990. The surge in realizations in 1986 as a capital gains tax rate increase was
preannounced provided compel ing evidence of the importance of a transitory response. A study
of the limits of realizations (which cannot exceed accruals in the long run) suggested the elasticity
(percentage change in realizations divided by the percentage change in the tax rate) could be no
more than 0.5 in absolute value (evaluated at a 22% tax rate) and a midpoint of 0.25. Several new
econometric studies, using new techniques to isolate the permanent response, suggested
elasticities of around 0.5 or less. Other recent studies suggested larger responses. The most recent
study indicated an elasticity of 0.3. The JCT appears to maintain its original assumption, and
Treasury’s response has been reduced to be similar to JCT’s; both appear to exceed the
realizations limit.
Simulations indicate an increase in capital gains tax rates of five percentage points would raise
slightly more than $40 bil ion on a static basis for 2019, about $30 bil ion using the 0.25 elasticity
and $18 bil ion using the 0.5 elasticity. The JCT estimates likely would be around $10 bil ion,
reflecting a 0.68 elasticity. Taxing gains on an accrual basis would eliminate this response in the
long run and gain additional revenues on currently unrealized gains.
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Contents
Introduction ................................................................................................................... 1
Realizations Responses and Revenue ................................................................................. 2
The 1990 Debate............................................................................................................. 4
Developments Since 1990 ................................................................................................ 6

Tables
Table 1. Realizations Elasticities, Post-1980s Studies............................................................ 7
Table 2. Revenue Gain from Increasing Capital Gains Tax Rates by Five Percentage
Points, Estimates for FY2019 Based on Alternative Realizations Responses ........................ 10

Table B-1. Elasticities from Studies of the 1980s................................................................ 15

Appendixes
Appendix A. Technical Appendix .................................................................................... 13
Appendix B. Econometric Studies ................................................................................... 15
Appendix C. Citations to Studies ..................................................................................... 21

Contacts
Author Information ....................................................................................................... 22

Congressional Research Service

Capital Gains Tax Options: Behavioral Responses and Revenues

Introduction
The Bush tax cuts, enacted in 2001 and 2003, were scheduled to expire at the end of 2010.
Among the expiring tax provisions was a lower 15% rate for long-term capital gains and
dividends, with a 0% tax rate on capital gains and dividends for taxpayers subject to ordinary
rates of 15% or less. Absent legislative action, capital gains tax rates would have reverted to pre-
2003 rates of 20% and 10% (18% and 8% for assets held for five years or more), and dividends
would be taxed at ordinary rates. The highest ordinary tax rate is currently 35% but, absent
change, wil rise to 39.6%.
President Obama proposed in both his budget outlines (FY2010 and FY2011) to retain the 15%
and 0% rates for lower- and middle-income taxpayers, but to tax both dividends and capital gains
at 20% for married couples with income of $250,000 or more and single taxpayers with income
of $200,000 or more. The tax rates were temporarily extended through the end of 2012 by the Tax
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312).
The final resolution at the beginning of 2013 (American Taxpayer Relief Act of 2012, P.L. 112-
240) was to tax capital gains for higher-income individuals at the higher rate, but at incomes of
$480,050 for married couples and $453,350 for singles in 2018, considerably higher than those
proposed by President Obama. The most recent tax legislation, the 2017 tax cuts (P.L. 115-97),
did not address capital gains and retained the same income breaks as in prior law (even though
these brackets changed for ordinary rates).Compared with most other tax provisions, the potential
revenue gain scored for an increase in capital gains taxes is strongly affected by behavioral
responses assumed by the Joint Committee on Taxation (JCT) and the Department of the
Treasury. As an il ustration, the Obama Administration estimated in February 2010 that al owing
the Bush tax cuts for capital gains to expire would have raised $16 bil ion of revenue in FY2019.1
Yet, based on Congressional Budget Office (CBO) projections in January 2010, the current
effective capital gains tax was 13.3% in 2008 and would have increased to 17.9% in 2019;
applying the differential in these rates to the realizations in 2019 would have produced a revenue
difference of $40 bil ion.2 Although some of this differential could arise from different forecasts,
assumptions about behavioral responses are the main reason for the reduction in projected
revenues.
To address these potential behavioral responses, some supporters of increasing taxes on capital
gains (given that such gains comprise a significant part of the income of high-income
individuals),3 including Senator Ron Wyden, incoming chairman of the Senate Finance
Committee, have proposed applying mark-to-market rules to tax capital gains as accrued, which
would eliminate the realization response for affected assets.4 Assets that are less easily valued

1 FY2019 is used as an example of a long-run effect; the first few years may differ as a result of assumed short-term
responses. In addition, later years may reflect more normal times as asset values are more likely to have rebounded
fully from the recession. For the T reasury estimates, see General Explanation of the Adm inistration ’s FY2011 Revenue
Proposals
, February 2010, p. 153, at http://www.treas.gov/offices/tax-policy/library/greenbk10.pdf.
2 T his calculation is based on an average tax rate of 13.3% in 2008 and 17.9% in 2019 (supplied by CBO), with the
differential applied to projected realizations in 2019, in Congressional Budget Office, The Budget and Econom ic
Outlook: Fiscal Years 2010 to 2020
, p. 85, at http://www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf.
3 According to the Congressional Budget Office, capital gains are 24% of the income of individuals with income of $1
million or more and 1% or less of the income of individuals with income of $200,000 or less. See The Distribution of
Asset Holdings and Capital Gains
, August 4, 2016, https://www.cbo.gov/publication/51831.
4 See Jad Chamseddine, “Wyden Eyes Corporate T ax. Capital Gains Reform as Finance Chair, T ax Notes T oday
Federal, January 14, 2021. See also “ T ax Proposals of President -Elect Biden and Other Prominent Democrats,” The
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Capital Gains Tax Options: Behavioral Responses and Revenues

could be subject to look-back treatment, which would increase the tax to achieve the same after-
tax earnings that would have occurred if the tax were imposed on an accrual basis.5 Such an
approach has a number of complexities,6 and to the extent that these changes aim to address the
behavioral response, it is important to understand the limits this behavioral assumption imposes
on options for increasing taxes on realized capital gains and the empirical basis for these
estimated effects.
President-elect Joe Biden has proposed an increase in the top capital gains tax rate from 20% to
39.6% for those with more than $1 mil ion in income. The JCT likely would score that change as
a revenue loser given the response they rely on, but the Biden plan also proposes to tax capital
gains at death for those with over $1 mil ion in income. This change should greatly reduce any
expected behavioral response by not al owing capital gains to escape income taxation entirely if
held until death as they do under current law.7
Realizations responses in revenue projections by the revenue-estimating agencies (JCT and
Treasury) were publicly discussed at the end of the 1980s, in the midst of a contentious debate.
This report explains how these responses affect revenues, discusses the debate that occurred in
the late 1980s, reviews research since that time, and analyzes the implications for revenue
effects.8 The analysis in this report suggests that the Obama Administration’s projections and
those of the JCT, absent a change in their realizations response, may likely understate revenue
gains from al owing lower capital gains tax rates to expire.
Realizations Responses and Revenue
Because taxpayers can choose to realize capital gains, economists and policymakers have been
concerned about a reduction in the potential revenue from capital gains taxes because those taxes
reduce realizations. It is possible for a tax increase to lose revenue if the response is large enough.
If realizations are postponed until death, the gains escape tax entirely.9 Thus, there is an incentive
to delay and perhaps ultimately avoid the tax by not sel ing assets.
Capital gains realizations responses are typical y expressed in the form of an elasticity, which is
the percentage change in realizations divided by the percentage change in taxes. These elasticities
are expected to be negative but are often reported without the minus sign (and wil be in this
report). If realizations increase by 5% when the tax rate fal s by 10%, the elasticity is 0.5; if

National Law Review, vol. 11, no. 15 (January 15, 2021), https://www.natlawreview.com/article/tax-proposals-
president -elect -biden-and-other-prominent-democrats.
5 In a look-back treatment, the ratio of sales price to acquisition, along with holding period, could be used to determine
the average rate of gain, with net proceeds recalculated to assume that gain was taxed on an accrual basis, leading to a
smaller appreciation. An additional tax would be collected by reducing the basis to make the proceeds equal to that net
of tax gain.
6 For a discussion of issues relating to interaction with incentives for depreciating assets, transition rules, exemptions,
indexing for capital gains, treatment of losses, and avoidance techniques, see Jane G. Gravelle, “ Sharing the Wealth:
How to T ax the Rich,” National Tax Journal, vol. 73, no. 4 (December 2020), pp. 951-968.
7 See “T ax Proposals of President -Elect Biden and Other Prominent Democrats,” The National Law Review, vol. 11,
no. 15 (January 15, 2021), https://www.natlawreview.com/article/tax-proposals-president-elect-biden-and-other-
prominent -democrats.
8 Numerous other issues are relevant to evaluation of capital gains taxes including economic effects and distributional
concerns. See CRS Report 96-769, Capital Gains Taxes: An Overview, by Jane G. Gravelle.
9 T his treatment is called step-up in basis and means that when the heir sells an asset, the basis, or amount deducted
from the sales price to determine taxable gain, will be the value at the tim e of death rather than the original acquisition
cost of the decedent.
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Capital Gains Tax Options: Behavioral Responses and Revenues

realizations increase by 10% when the tax rate fal s by 10%, the elasticity is one; if realizations
rise by 20% while the tax rate fal s by 10%, the elasticity is two.
The higher the value of the elasticity, the smal er the revenue gain or loss from a capital gains tax
increase or decrease. If the elasticity is less than one, a tax increase gains revenue; if the elasticity
is greater than one, the tax increase loses revenue. For a smal increase in tax rates, the ratio of
revenue gain projected to the gain realized with no behavioral response (static gain) is one minus
the elasticity. Thus, if the elasticity is 0.25, 75% of the static revenue gain wil be realized (that is
(1-0.25) times the static gain). If the elasticity is 1.25, the tax increase wil lose 25% of the static
gain (i.e., (1-1.25) equals minus 0.25).10
Three types of elasticities are relevant to capital gains realizations and revenues and are discussed
in the economics literature. The first is the permanent elasticity, which is most relevant for
permanent tax law changes: it measures the longer-run (after a year or two) realizations response
to a permanent change in tax rate. The second is the short-run elasticity, which measures the
short-term response to a permanent change. The third is the transitory elasticity, which measures
the response to a temporary tax increase or decrease. This transitory effect might occur because
the incomes of wealthy individuals (and the associated taxes due) may vary from year to year, and
they time realizations in years when their tax rates are low. It may also occur in the aggregate
when a tax change is pre-announced. For example, if taxpayers learn that the tax is increasing
next year, they may shift realizations into the current year to take advantage of this year’s lower
tax rate.
Although this discussion wil focus on the magnitude and effects of permanent elasticities, these
short-term and transitory effects constitute both a chal enge in estimation and affect shorter-term
responses to changes. Thus a brief discussion is in order.
The short-term realizations elasticity has most often been discussed (as it was in the late 1980s) in
the context of a capital gains tax cut. The idea behind such as response is that taxpayers have a
large stock of accrued gains that they would have already realized if the tax rate were lower and
thus there wil be a larger increase in realizations in the first year or two.
Applying such an effect has two caveats. The first is that the short-term response may be muted if
there has been a recent increase in realizations. For example, unbeknownst to revenue estimators
in the late 1980s (because the data were not available), there had been a surge in realizations in
1986 because of the pre-announced increase in capital gains taxes for 1987 and later years as part
of the Tax Reform Act of 1986. With so many of these accrued gains exhausted, it was unlikely
that there would have been a very large short-run response had a tax cut been enacted in 1990.
Second, and more important for the current issue, there is no reason to expect that short-run
responses apply to a tax increase that is not pre-announced, because, although a cut in taxes may
unleash significant short-term realizations from the existing stock of gains, an increase should not
cause a similar contraction. The stock of gains that has not been realized because of taxes wil
simply remain unrealized, with no effect on realizations.11
The transitory response is sometimes used interchangeably with the short-term response, but
transitory responses can be thought of as occurring because of a temporary lower or higher rate.

10 T his rule is not strictly applicable for large changes because the elasticity may change as the tax rate changes.
11 Gains could fall a little more initially because the gains not realized today would be available in the future, and also
because of sticker shock. But this phenomenon is very different from the large responses in gains that are from the
current stock of gains with a tax cut. It is also a timing effect, but evidence suggest s that, in the steady state, virtually
all of the accrued gains not realized are never realized, but held until death. See Jane Gravelle, “ Limits to Capital Gains
Feedback Effects,” Tax Notes 51, April 22, 1991, pp. 363-371.
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As noted above, a large aggregate transitory response occurred in 1986 because of the passage of
legislation that raised future tax rates significantly. A large increase also occurred in 2012 for the
same reason. However, because the higher-income taxpayers who realize most capital gains can
have significant fluctuations in income and taxes, transitory responses occur among individuals
even in years when the law does not change. This possibility of a transitory response was more
pronounced in the period (prior to 1987) when capital gains were subject to graduated rates
(because the tax benefit was an exclusion rather than a fixed rate).
Statistical estimates of realizations responses can be based on a variety of functional forms, but
one of the most common functions causes the elasticity (percentage change in gains divided by a
percentage change in tax rates) to rise proportional y with the tax rate. Therefore elasticities
should be reported with reference to the assumed tax rate. For much of the discussion in the 1990
debate, the relevant tax rate was the one associated with the tax change under consideration, the
22% rate midway between the current and new rate. Many elasticities discussed at that time
reflect that rate. Capital gains realizations elasticities are expected to be negative but the
elasticities in this report wil be stated and referred to in absolute value (without the minus sign).
This formulation also leads to a revenue-maximizing tax rate, which is the tax rate at which the
most capital gains tax revenue wil be realized. The underlying equations are presented in
Appendix A.
For considering the effects of al owing tax increases, the 22% rate appears appropriate as a
starting point (although the effect would roughly reflect the midpoint between the old and new
tax rates). Under current law, in addition to the rates of 0%, 15%, and 20%, there is also the 3.8%
net investment income tax enacted by the 2010 health care law for taxpayers with incomes above
$250,000 for couples and $200,000 for singles. The Congressional Budget Office estimates an
overal marginal tax rate of 21.2% for long-term capital gains, and the Department of the
Treasury estimates a similar rate of 21.3%.12
Note that these issues surrounding capital gains taxes and realizations are not applicable to taxes
on dividends, which are estimated by CBO to be taxed at a slightly lower marginal rate of
18.4%.13
The 1990 Debate
In 1990, the George H. W. Bush Administration proposed to reduce the capital gains tax rate that
had been adopted in 1986. That legislation increased the top rate on capital gains from 20% to
28% by taxing capital gains as ordinary income. During the late 1980s, the revenue-estimating
agencies (the Joint Committee on Taxation and the Department of the Treasury’s Office of Tax
Analysis) had begun to investigate and add behavioral responses in the form of realizations
elasticities. The Congressional Budget Office also began to include tax variables in their
regressions used to forecast baseline capital gains revenues.

12 Congressional Budget Office, Taxing Capital Income: Effective Marginal Tax Rates Under 2014 Law and Selected
Policy Options
, December 18, 2014, https://www.cbo.gov/publication/49817, p. 34; U.S. Department of T reasury,
Office of T ax Analysis, Marginal Incom e Tax Rates by Incom e Source, 2016, prepared August 2015,
https://home.treasury.gov/policy-issues/tax-policy/office-of-tax-analysis.
13 Ibid.
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Because of the strict budget constraints applying at that time, the issue of revenue cost was a
crucial one in 1990.14 The Administration chose an elasticity (at a 22% rate) of 0.98. The JTC
used an elasticity of 0.76.15
Two types of data were used to estimate the realizations response. The first was aggregate time
series, which related total realizations in different years to the tax rate in that year. The second
was micro-data studies, which examined individual taxpayers’ realizations in comparison to their
tax rates. These studies included cross-section studies (which compare taxpayers in a single year),
pooled cross-section time-series (which compare taxpayers and include many years but do not
follow individual taxpayers over time) and panel studies (which compare taxpayers over time,
tracking each taxpayer).
As shown in Table B-1 in Appendix B, estimates of the realizations response varied
dramatical y, from 0.3 to almost 4. To make the revenue implications clear, an elasticity of 0.3
would imply, for a smal increase in the tax rate, that the revenue gained would be 70% of the
revenue projected if there were no realizations response. An elasticity of 4 implies a loss of three
times the projected revenue gained if there were no behavioral response. Estimates based on
aggregate time series were general y lower, ranging from 0.3 to 0.9 (70% to 10% of revenue
gained). Estimates based on individual taxpayer data ranged from 0.55 to 3.8.
The range of estimated responses and their implications for revenue implied serious problems
with the estimation methods. The range was particularly broad for estimates based on individual
data. The JCT took the position that the time series results were more reliable, and they estimated
their own elasticity using this methodology. The Treasury never actual y provided a specific
methodology for their number, but rather reported it as a conservative choice given the
realizations estimates.
Researchers trying to estimate the realizations response faced many problems, which are
discussed in more detail in Appendix B. In general, individual data are preferred for estimation,
because aggregation can produce a bias and loses information. In addition, it is very difficult to
control for other factors that change over time.
More important, for using individual data, was the problem of distinguishing between permanent
and transitory responses. Because income, especial y of high-income individuals who realize
most gains, can fluctuate over time, tax rates also vary over time. Individuals would be expected
to time realizations to coincide with periods of low rates. Individuals might also need to cash in
assets when income (and therefore taxes) is unusual y low. This concern basical y precluded
relying on simple cross-section results for permanent responses. Thus, no revenue-estimating
entity relied on the larger elasticities (close to 4) produced by some of these micro-data studies.
Arguments were made at the time that panel data, which followed individuals over several years,
could be used to separate these elasticities, because in these data individual tax rates could be
examined over several years. These studies used the average of the current, previous, and future

14 During that time, tax changes were constrained by deficit targets under legislation popularly known as Gramm -
Rudman. See CRS Report RL30009, Tax-Cut Legislation: Applicable Budget Enforcem ent Procedures, by Robert
Keith, available to congressional clients upon request.
15 Sources for these data are in an archived CRS report that was published in Tax Notes, Jane Gravelle, “ Can a Capital
Gains T ax Cut Pay for Itself?” Tax Notes 48, July 9, 1990, pp. 209-219. T hese elasticities are reported before
adjustments for portfolio responses and are larger than the elasticities actually used for revenue estimating, which were
0.7 and approximately 0.9.
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tax rate as a permanent rate. These studies reported smal er elasticities, but ones that stil were
wel above one in some cases.
Because of an incorrectly reported elasticity, the three panel studies available at that time
appeared to produce a much narrower range of results. These panel results probably influenced
the Treasury to choose a larger elasticity than those suggested by the aggregate time series data.
However, as noted in the following section, the last panel study also had a very large elasticity.16
Thus, although attempts were made to address the problem of transitory effects with panel
studies, this procedure may not correct for the transitory effect, perhaps because periods of lower
income or higher income can continue for several years.
Although panel studies offered some possibility of controlling for transitory effects, the panels
available were for only a few years. If the higher-income individuals who realize most gains
experienced prolonged spel s of higher or lower than normal income, panel studies might reduce
the transitory element, but estimates could stil reflect some transitory response elements. Thus
panel estimates could stil be too large, whereas the biases in time-series estimates remained
uncertain. Neither approach was without flaws.
Ultimately the proposed tax cuts were not enacted at that time (although they were eventual y
reduced in 1997 and again in 2003).
Developments Since 1990
The range of realizations elasticities, even if confined to time series estimates, is very broad for
revenue-estimating purposes or otherwise evaluating capital gains taxes. Researchers turned their
attention to methods to produce more precise and reliable estimates.
One important event that influenced thinking about these elasticities was the sharp spike in
realizations that occurred in 1986. Between 1985 and 1986, realizations rose from $170.6 bil ion
to $324.4 bil ion, fal ing to $144.2 bil ion in 1987.17 A study of this phenomenon using taxpayer
data showed that these gains occurred in December, and were seven times the gains in December
of the previous year.18 This increase, which took place when a tax increase was passed for the
following years, was evidence of the magnitude of transitory realizations responses and
contributed further to concerns about the reflection of transitory responses in the econometric
studies.
Eleven additional academic econometric studies of the realizations response have been identified
beginning in 1990, and nine of those studies are reported in Table 1.19 The table also includes

16 T he three panel studies, whose results are reported along with other studies in Appendix B, originally reported
elasticities of 0.55, 1.29 and 1.65. T his range was still wide, but the upper limit was much lower than the high estimates
in cross-section studies. Moreover, the 0.55 may have been low because of the low tax rate in that study. As discussed
in the next section, however, the elasticity for the latest panel study (Gerald E. Auten, Leonard E. Burman, and William
C. Randolph, “Estimation and Interpretation of Capital Gains Realization Behavior: Evidence from Panel Data .”
National Tax Journal
, September 1989, pp. 353-374) was reported as 1.65, but should have been reported as 3.2. T his
estimate was similar to the estimates from single year cross sections. T hus the short -panel approach did not appear to
address the transitory issue. T he other micro-data approach, pooled cross-section times series, with a 1.18 elasticity,
also likely reflects a mix of permanent and transitory effects.
17 T hese data are reported in Robert Gillingham and John S. Greenlees, “T he Effect of Marginal T ax Rates on Capital
Gains Revenue: Another Look at the Evidence,” National Tax Journal, vol. 45, June 1992, p. 176.
18 See Leonard E. Burman, Kimberly A. Clausing, and John F. O’Hare, “T ax Reform and Realizations of Capital Gains
in 1986,” National Tax Journal, vol. 47, March 1994, pp. 1-18.
19 All of these studies are summarized in Appendix B, but two are excluded because they basically repeat the now
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estimates of practices by CBO, JCT, and Treasury.20 CBO cautions that its realizations estimate is
not for the purpose of estimating revenues. Rather, the tax rate is included as part of an overal
statistical study which includes many variables used to project capital gains realizations for the
baseline.21
The second column of Table 1 reports the coefficient which, multiplied by the tax rate, wil
produce the elasticity. The studies are arrayed by elasticity, from smal est to largest.
Table 1. Realizations Elasticities, Post-1980s Studies
Realizations

Elasticity at
Sources of Data
Coefficient
22%
No Change in Behavior
0.0
0.00

Burman and Randolph Panel
1.0
0.22

Study (1994)
Auerbach and Siegel Panel
1.126
0.25

Study (2000)
Gravel e Limit Study Midpoint
1.136
0.25

(1991)
Agersnap and Zidar (2020)
1.4
0.31

CBO Time Series (2010)
1.76
0.39

Minas, Lim, and Evans Time
2.15
0.47

Series (Australia, 2018)
Gravel e Limit Study Upper
2.27
0.5

Limit (1991)
Eichner and Sinai Time Series
2.28
0.5

(2000)
Bogart and Gentry State
2.5
0.55

Panel Study (2000)
Bakija and Gentry State Panel
2.91
0.64

Study (2014)
JCT (Current)
3.1
0.68

Treasury (current)
3.25
0.72

Gil ingham and Greenlees
3.4
0.75

Time Series (1992)
Auten and Joulfaian Panel
3.6
0.79

Study (2004)
Dowd, McClel and and
4.1
0.90

Muthitacharoen Panel (2015)
Source: See Appendix B for summaries of studies and Appendix C for citations.

discredited methodologies of cross-section and short -panel studies.
20 Coefficients currently used were provided by these agencies.
21 For that reason, CBO does not focus as heavily on specification with respect to the tax rate as researchers
concentrating on the realizations response might. For example, the CBO regression does not use instrumental variables.
CBO also notes that the est imated realizations response is sensitive to other variables included. For other specifications,
CBO finds a realization coefficient as large as 2.9.
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Notes: 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 long-term 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.
Table 1 also includes the results of a study by Gravel e, which was not an econometric study.22
Some analysts had observed that large estimated elasticities from cross-section and panel studies
implied large realizations that were far outside the scope of historical experience.23 Gravel e’s
study noted that there was a limit to the realizations response in that, for a permanent elasticity,
realizations could not exceed accruals (the change in the market value of assets). If every asset
were sold every year, realizations would equal accruals, but they could be no larger. The study
provided data on the ratio of realizations to accruals, along with tax rates, over a long period of
time, and used the average values to estimate the upper limit of the realizations elasticity. The
study found that limit to be 0.5, below the estimates of al existing cross-section and panel
studies, and below most of the time series studies. Moreover, the 0.5 limit is an upper limit and
implies that in the absence of taxes and transactions costs individuals would sel every asset every
year. Because some assets are unlikely to be sold even in those circumstances, because investors
are satisfied with their investments, the elasticity is likely to be considerably lower. (For example,
individuals and families holding controlling shares of corporations are unlikely to sel their assets,
as are individuals with investments in family businesses and real estate, or simply those whose
portfolios are satisfactory.) Table 1, therefore, reports both the upper limit and the midpoint of
this study.
This study was prepared in 1991, and covered the data from 1954 to 1989. In the study, the
realizations to accruals level was estimated at 46% and the tax rate was estimated at 18.4%. More
recent evidence covering the period 1989-2013 finds a similar ratio, 48%, and a similar tax rate of
17.3%.24 These findings support the limits to realizations elasticities found in the initial Gravel e
study.
As an il ustration, the Dowd, McClel and, and Muthitacharoen panel study that produced the
highest coefficient implies that if al income taxes and transactions taxes and costs were
eliminated, realizations would 4.25 times their current value, when the level of accruals suggests
they could be no more than twice as large.25

22 T his study is an archived CRS report, which was published by T ax Notes. See Jane Gravelle, “ Limits to Capital
Gains Feedback Effects,” Tax Notes 51, April 22, 1991, pp. 363-371.
23 See, for example, Alan J. Auerbach, “Capital Gains T axation and T ax Reform,” National Tax Journal, September
1989, pp. 391-401.
24 Accruals were taken from Jeff Larrimore et al., Recent Trends in U.S. Top Income Shares in Tax Record Data using
More Com prehensive Measures of Incom e Including Accrued Capital Gains
, NBER Working Paper 2300, June 2017;
data on realizations and tax rates from U.S. Department of T reasury, Office of T ax Ana lysis, Taxes Paid on Long Term
Gains: 1977-2014
and Taxes on Capital Gains for Returns with Positive Net Capital Gains: 1954 -2014, both prepared
December 2016, https://home.treasury.gov/policy-issues/tax-policy/office-of-tax-analysis.
25 Using the semi-log elasticity outlined in Appendix A, eliminating all taxes would cause the new realizations
compared to the old to be ebt, where b is the coefficient and t is the tax rate. T heir value of b is 4.1. Considering the
federal tax rate of 21.3% alone, the ratio is 2.39. If state and local taxes are 2.4% as reported by the Bakija and Gentry
study, the tax rate would be 23.7% and the ratio would be 2.64. T he 1991 Gravelle study estimated transactions costs to
be 11.6% of realizations. T hese costs include a small transactions cost for stocks but more significant ones for real
estate and property, where sales commissions, legal costs of sales, and transfer taxes are larger. All of these costs are
applied to sales price and are larger relative to realizations. Adding these amounts to taxes increases the rate to 35.3%
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That same study also corrected the elasticity for the most recent panel study of the 1980s,
indicating an elasticity of 3.2, similar to the cross-section results.26 This correction reinforced the
observation that the panel studies could not necessarily address the transitory issues that plagued
cross-section studies.
Of the 10 studies, 4 are panel studies, 3 are times series, and 3 are cross-state aggregate panel
studies. The Burman and Randolph study was an early innovative econometric study because it
used variation in state tax rates to estimate the permanent elasticity. That study found a very smal
elasticity that was statistical y insignificant and a very large (in excess of 6) transitory elasticity.
Because state tax rates are exogenous and presumed permanent, their evidence suggested a very
smal response. Auerbach and Siegel replicated their approach with different years and found
similar results. The findings in these studies were consistent with the Gravel e estimate of limits
in that they fel below the upper limit of elasticities. Most subsequent studies have incorporated
state tax rates.
The Auten and Joulfaian study and the Dowd, McClel and, and Muthitacharoen study are
individual panel studies and had the highest elasticities of any of the studies. Two aspects were
likely to lower their elasticities compared with earlier panel studies: they added state tax rates and
they had a longer panel, so that time series effects probably became more important. Both studies,
however, continued the approach used by earlier panel studies that used adjacent years to capture
permanent tax rates. This period may be too short, and for that reason their estimates probably
continue to reflect transitory, timing responses. These timing responses are not appropriate for
measuring a permanent response. The Dowd, McClel and, and Muthitacharoen study also
provided sensitivity analysis, producing a wide range of estimates reflecting different
specifications, inclusion of different variables, and different time periods. For example,
considering different time subperiods, the coefficient ranged from 1.8 to 8.0, although the latter
estimate would seem questionable because it also produced a large transitory elasticity of the
wrong sign.
Three of the studies (along with CBO’s estimate) used aggregate time series data. The Gil ingham
and Greenlees study was the earliest and added a few years of data to some earlier studies,
whereas the other time series studies (Eichner and Sinai) added many more years. Both studies
control for 1986, which was an unusual year. It appears that more years added to time series data
lead to lower elasticities; however, al of the time series results fal within the range of the eight
time series studies from the 1980s. One time series study fal s below the upper limit estimated by
Gravel e, one is about at the upper limit, and one is considerably larger. The third time series
study was based on Australian data (one of the rare studies undertaken on data outside of the
United States).
The three state studies, by Bogart and Gentry, Bakija and Gentry, and Agersnap and Zidar, used
aggregate data over time grouped by state. Because they include time controls, they also relied on
cross-state variation to identify a permanent response. Their results were slightly above the
Gravel e study’s upper limit. Bakija and Gentry also show that the control for state fixed effects is
important; coefficients rise from 2.91 to 3.88 without state fixed effects. Agersnap and Zidar also
controlled for migration across the states.
The elasticities in Table 1 are closer together and lower than those in the studies of the 1980s.
JCT’s current coefficient appears to be similar to the estimate used during the 1990 debate

and the ratio of new to old realizations to 4.25.
26 T he study reported the elasticity of shares, rather than realizations. T his point is discussed further in Jane Gravelle,
“Limits to Capital Gains Feedback Effects,” Tax Notes 51, April 22, 1991, pp. 363-371.
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(although the elasticity was slightly higher in 1990, that appears to be due to the exclusion of
smal portfolio effects;27 without those, it would probably be around 0.76). The Treasury estimate
has been reduced and is now of the same rough magnitude as the JCT assumption.
Given the evidence from panel studies that use state variation to identify permanent effects and
studies of the reasonableness of elasticities given realizations responses, both JCT and Treasury
estimates appear high, so that they likely understate the revenue to be gained from increasing the
tax rate.
Table 2 uses the elasticities from Table 1 and the CBO projections to compare these revenue
estimates for raising the tax rate on capital gains by five percentage points, for 2019, based on
those results. (The method for calculating the revenue is in Appendix A.) The estimates are based
on CBO’s estimates of revenue for 2019 of $199 bil ion, and their average marginal tax rate of
21.2%.28 The $199 bil ion is adjusted down to $180 bil ion to reflect the share of gains that are
short-term gains taxed at ordinary rates, as reported by the Department of the Treasury.29
Table 2. Revenue Gain from Increasing Capital Gains Tax Rates by Five Percentage
Points, Estimates for FY2019 Based on Alternative Realizations Responses
Revenue Gain 2019
Ratio of Revenue Gain
Sources of Data
($billions)
to Static Gain
No Response
42.3
1.00
Burman and Randolph Panel Study (1994)
31.4
0.74
Auerbach and Siegel Panel Study (2000)
30.1
0.71
Gravel e Limit Study Midpoint (1991)
30.0
0.71
Agarsnap and Zidar (2020)
27.4
0.63
CBO Time Series (2010)
23.5
0.56
Minas, Lim and Evans Time Series (Australia, 2018)
19.6
0.46
Gravel e Limit Study Upper Limit (1991)
18.4
0.44
Eichner and Sinai Time Series (2000)
18.3
0.43
Bogart and Gentry Cross-State (2000)
16.1
0.38
Bakija and Gentry Cross-State (2014)
12.2
0.29
JCT (Current)
10.3
0.24

27 Portfolio effects adjusted revenue effects from a capital gains tax to account for shifting investments out of capital
gains producing assets taxed at a lower rate to other assets whose income would be taxed at higher rates.
28 Projection of gains from CBO, Revenue Projections, by Category, January 2019, at https://www.cbo.gov/about/
products/budget-economic-data#1. CBO’s marginal effective tax rate, which is almost identical to T reasury’s rate, is
from Congressional Budget Office, Taxing Capital Incom e: Effective Marginal Tax Rates Under 2014 Law and
Selected Policy Options
, December 18, 2014, https://www.cbo.gov/publication/49817, p. 34. T reasury’s tax rate of
21.3% is from U.S. Department of T reasury, Office of T ax Analysis, Marginal Incom e Tax Rates by Incom e Source,
2016
, prepared August 2015, https://home.treasury.gov/policy-issues/tax-policy/office-of-tax-analysis. T he Urban-
Brookings T ax Policy Center projects a lower capital gains marginal tax r ate of 19.9%. See T able T 18-0106, August
23, 2018, at https://www.taxpolicycenter.org/model-estimates/baseline-effective-marginal-tax-rates-august-2018/t18-
0106-effective-marginal-tax. This estimate was made later than the T reasury and CBO estimate, but based on the public
use file rather than actual tax data.
29 U.S. Department of T reasury, Office of T ax Analysis, Taxes Paid on Long Term Gains: 1977-2014 and Taxes on
Capital Gains for Returns with Positive Net Capital Gains: 1954 -2014
, both prepared December 2016,
https://home.treasury.gov/policy-issues/tax-policy/office-of-tax-analysis.
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Revenue Gain 2019
Ratio of Revenue Gain
Sources of Data
($billions)
to Static Gain
Treasury (2010)
8.9
0.21
Gil ingham and Greenlees Time Series (1992)
7.5
0.18
Auten and Joulfaian Panel Study (2004)
5.6
0.13
Dowd, McClel and, and Muthitacharoen Panel Study
1.0
0.03
(2015)
Source: Estimates in Table 1 and Applications of Formulas in Appendix A.
As shown in Table 2, the revenue gain as a percentage of static gain ranges from a reduction of
26% to a reduction of 97%. The revenue gain for the five-percentage-point tax rate increase
ranges, from the lowest to the highest elasticity, from $31.4 bil ion per year to $1 bil ion, a range
of $30.4 bil ion.
These results also il uminate the interest in adopting measures such as an accrual-based taxation
that could also include a look-back method. (See Appendix A for an explanation of calculating
taxes under the look-back method.) Such a method would not only eliminate the realizations
response, increasing capital gains revenues for the five-percentage-point increase from $10.3
bil ion to $43.2 bil ion, but by taxing unrealized gains it would collect $222 bil ion on unrealized
gains in a steady state ($180 bil ion at the old rates and $222 bil ion at the new rate).30
Which results are most reliable? The Auten and Joulfaian panel study, judging by problems with
short panels in the 1980s, probably retains some transitory elasticity effects because it applied the
same methodology. Although it also reflects time series elements, the estimate is probably an
overstatement of the permanent elasticity. It also substantial y exceeds the upper limit estimated
by Gravel e. The Dowd, McClel an, and Muthitacharoen study produced the largest elasticity and
also uses adjacent periods to measure the transitory elasticity. It also indicates dramatical y
differing estimates from different subperiods, implying some fragility in the estimates.
Turning to time series, the Eichner and Sinai results include many more years than Gil ingham
and Greenlees, suggesting that this time series result should be preferred. CBO includes even
more years. Given the findings of the remaining studies and of Gravel e’s limit calculations, the
elasticity is likely below 0.5.
The newest study, by Agersnap and Zidar, has the advantage of using exogenous changes (in state
tax rates) to identify the results, is a panel study, and controls for migration across the states. The
pattern of results over time is stable and consistent, with the expectation that the elasticities would
decline over time. By considering the results in the 9th and 10th years, the results are more likely
to avoid transitory and short-run effects and move closer to a permanent elasticity. They also are
consistent with the limits on realizations based on current realizations to accruals.
These findings suggest that revenue-estimating assumptions retained from the 1990 debate may
understate the revenue gain. In al cases, evidence from both post-1980s econometric studies and
the limits study indicates that there wil be revenue gains from increasing the tax rate by five
percentage points, although these gains are negligible relative to the static gain for the highest
elasticity. Assuming the lower elasticities (and consistent with the Gravel e constraints), revenue
gained would be three times the amount likely to be projected by the JCT. Using the Gravel e

30 Batchelder and Kamin estimated an average gain of $210 billion on average over the next 10 years if confined to the
top 1% and an average gain of $75 billion if restricted to the top 0.1%. See Lily L. Batchelder and David Kamin,
Taxing the Rich: Issues and Options, last revised February 1, 2020, https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=3452274.
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upper limit, revenues would be 45% larger. Thus, the JCT’s projections, absent a change in their
realizations response, may likely understate revenue gains from increasing capital gains tax rates.
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Appendix A. Technical Appendix
This appendix shows in the first section the standard realization of revenues from a coefficient
derived from a semi-log function. The second shows the method of calculating taxes under the
look-back method.
Modeling Realizations and Revenues
The elasticity of realizations with respect to taxes can be estimated with a variety of functional
forms, but one of the most common, and the one on which the estimates in Table 2 are based is a
semi-log function of the form (excluding the constant and other regressors, such as stock market
values and GDP):
(1) log G = bt
where G is gains, t is the tax rate, and b is the tax rate coefficient to be estimated. If equation (1)
is differentiated, and b is restated in absolute value, the result is:
(2) dG/G = -b dt
Multiplying the right hand side top and bottom by t results in an elasticity (dG/G divided by dt/t)
of bt. Because the relationship is normal y negative, but it is convenient to restate b in absolute
value, a minus sign is added to b.
If equation (1) is restated in its original, nonlogged form (again ignoring other explanatory
variables and stating b in absolute value), it is:
(3) G = A e-bt
Since revenues are tG, the revenue equation is written:
(4) R = tAe-bt
Note that if equation (4) is logged and differentiated, the result is dR/r = dt/t (1-bt). Thus, if the
absolute value of the elasticity bt, is 1, there is no revenue gain.
To estimate revenues, denoting new values with an *, divide new revenues by old to achieve:
(5) R* = R* (t*/t)e-b(t*-t)
The revenue maximizing tax rate is where dR/R=0, or where (1-bt) equals zero. This rate is equal
to 1/b. Thus, if the coefficient of b is two, the revenue maximizing tax rate is 50% and if b equals
5 the revenue maximizing tax rate is 20%.
Calculating Taxes Under the Look-Back Method
A look-back method decreases basis (i.e., increases taxable gain) in order to achieve the same net
on a sale as if the tax had been paid on an accrual basis. In these calculations, g = growth rate, T=
holding period, S = sales price, B = basis, t = tax rate, and B* = new basis.
To determine the growth rate g:
(1) B(1+g)T = S
And solving for g:
(1) g = (S/B)(1/T) -1
To find a value of B* that wil give you the same return as accrual taxation:
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The gain on realization with the new basis is S-t(S-B*)
The gain on accrual is B(1+g(1-t))T
Equating them and substituting in for the value of g:
(3) B(1+ ((S/B)1/T -1)(1-t))T = S-t(S-B*)
Solving for B*
(4) B* = [B(1+ ((S/B)1/T -1)(1-t))T -S(1-t)]/t
It would also be possible, although more complicated, to al ow taxpayers to elect or be required to
pay an estimated accrual tax. In that case, the gain on realization in the formula would be adjusted
to reflect taxes paid. For example, for an asset held for two years, with tax at rate t1 paid in the
first year with an estimated value of V1 , the tax paid in the first year with interest equal to the
gains rate would be t1(V1-B)(1+g), and the new estimated basis, B* would be increased by t1(V1-
B)(S/B)(1/T) /t, or if tax rates are constant, (V1-B)(S/B)(1/T). If the asset were held three years and
tax paid in the first two years (using subscripts 1 for the first year and 2 for the second year), two
terms would be added to basis: t1(V1-B)(1+g)2/t (that is, t1(V1-B)(S/B) (2/T) 2/t) and t2(V2-
V1)(1+g)/t (that is, t2(V2-V1)(S/B)(1/T)/t.
Inflation can also be implemented in the look back formula, and it is especial y easy if inflation is
treated as uniform (although transition rules may complicate matters). The inflation rate is
denoted as p, and g now is the real appreciation rate:
(5) B((1+g)(1+p))T = S
And
(6) g= (S/B)(1/T)/(1+p) -1
The remainder of the calculations wil follow treating g as the real return, and the new basis may
be larger or smal er than the original cost.


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Appendix B. Econometric Studies
Elasticities in Studies of the 1980s
Table B-1
reports the elasticities found in a series of estimates of the realizations elasticity in the
1980s, the information available to influence a choice of realizations response at the time of the
1990 debate. These studies are discussed in general terms earlier, and in more specific terms in
the following subsection. Where possible elasticities are reported at a 22% tax rate. The studies
are divided into categories based on the fundamental approach used. Citations to al studies in this
report are in Appendix C.
Table B-1. Elasticities from Studies of the 1980s
Study
Elasticity
Aggregate Time Series


Auten (1982)
0.80

Treasury (1985)
0.84

CBO (1986)
0.27

Darby, Gil ingham, and Greenlees (1988)
0.58

CBO (1988)
0.76

CBO Alternative (1988)
0.45

Auerbach (1989)
0.54

Jones (1989)
0.89
Micro-Data: Panel


Auten and Clotfelter (1982)
0.55

Treasury (1985)
1.29

Auten, Burman, and Randolph (1989)
3.20
Micro-Data: Cross-Section


Feldstein, Slemrod, and Yitzhaki (1980)
3.75

Minarik (1981)
0.62

Gil ingham, Greenless, and Zeischang (1989)
3.80
Micro-Data: Pooled Cross-Section Time-Series


Lindsey (1987)
1.18
Treasury Elasticity, 1989
0.98
Joint Committee on Taxation Elasticity, 1989
0.76
Source: Table Reproduced from Table 2 in Jane Gravel e “Can a Capital Gains Tax Cut Pay for Itself?” Tax
Notes
48, July 9, 1990, pp. 209-219. The elasticity for the Auten, Burman, Randolph panel study was revised from
1.65 to 3.2 reflecting the discussion in Jane Gravel e, “Limits to Capital Gains Feedback Effects,” Tax Notes 51,
April 22, 1991, pp. 363-371.
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General Issues
Statistical (or econometric) studies relating capital gains realizations to tax rates face many
chal enges, and some of the debate over the evidence reflects the concerns about these chal enges.
The debate also concerned which type of data should be used: aggregate time series (which
examines total economy-wide realizations over time compared with the economy-wide tax rates)
versus individual taxpayer data (which related individual realizations to individual tax rates). As
can be seen in Table B-1, aggregate time series results were general y smal er and more
consistent, fal ing within a range of 0.3 to 0.9. Estimates based on micro data (individual
observations) varied from 0.55 to almost 4.31 The estimate for the pooled time-series, cross-
section regression probably reflects a mix of times series and cross-section results.
Other things equal, it is more desirable to use individual data, because aggregate data cause a loss
of information (i.e., individual variability is lost when individual responses are aggregated) and
can bias the results. In addition, it is difficult to control for al of the changes over time that can
affect realizations. Two of these, changes in transactions costs and a disconnect between changes
in asset prices and changes in accruals, could cause estimates to be overstated.32 Nor is it clear
that the times series estimates are capturing only permanent effects. Other effects, however, could
work in the opposite direction.
Yet the problems associated with studies based on individual data sets were so severe that many
researchers believed that aggregate time series results were more reliable.
As an initial problem and point of contention, the effective capital gains tax rate, which would be
used as a predetermined (exogenous) variable to explain realizations in a regression, is actual y an
endogenous variable which is influenced by the amount of realizations itself. Different techniques
could, in theory, be used to address this very serious econometric problem, including using the
first dollar tax rate (the tax that would appear on the first dollar of capital gains), using maximum
statutory rates, using a rate based on predicted gains (where predicted gains are based on other
attributes), or using instrumental variables methods.33 In general, these problems of endogeneity
of the explanatory variable are much more severe in the case of individual cross-section data,
where much of the variation is due to individual circumstances, and less important in aggregate
time series data where the major source of variation is changes in the law.
As noted earlier, another important issue, for using individual data, was the problem of
distinguishing between permanent and transitory responses. Because income, especial y of high-
income individuals who realize most gains, can fluctuate over time, tax rates also vary over time.
Individuals would be expected to time realizations to coincide with periods of low rates.
Individuals might also need to cash in assets when income (and therefore taxes) is unusual y low.
Although attempts were made to address this problem with panel studies by averaging the
previous year, current year, and next year tax rates to create a permanent rate, this procedure may

31 It was not possible in most cases to adjust the results for a consistent tax rate and the 0.55 panel estimate may reflect
an unusually low tax rate. T he 0.62 cross-section estimate may be affected by treatment of the truncation of gains at
zero.
32 T hese issues are discussed in Jane Gravelle “Can a Capital Gains T ax Cut Pay for Itself?” Tax Notes 48, July 9,
1990, pp. 209-219.
33 With instrumental variables (which is done by a two-stage least squares method), a preliminary regression treats the
tax rate as the dependent variable (endogenous) and estimates it using other predetermined instruments. For example,
one approach is to regress the actual tax rate on first dollar rate, predicted rate, maximum rate, etc. and use the fitted
values in the final regression, where the dependent variable is realizations. Using the maximum tax rate alone cannot be
used in a single cross-section regression and it is problematic in time series studies that cover periods when the
relationship between the maximum and average rate changed over time due to changes in the law.
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not correct for the transitory effect, perhaps because periods of lower income can continue for
several years.
Studies Since the 1980s
The following discussion reviews the realizations studies published since the 1980s. In some
cases, studies used many specifications, and this section explains why specific results were
reported in Table 1, and why results from two studies were not included. References to these
studies are in Appendix C. They are discussed in order of publication.
Slemrod and Shobe (1990)
This study uses a six-year smal panel to replicate the Feldstein, Slemrod, and Yitzhaki and the
Auten and Clotfelter studies. The authors found varying, but quite large, elasticities (in excess of
1, and in excess of 5 in some cases). Their study appears to confirm potential problems with these
studies, and also suggests short panels have significant problems as wel (as the elasticity for their
full sample was 5.84). These large elasticities are similar to those from cross-section and some
panel studies in the 1980s, although some were not statistical y significant and results varied
significantly over time periods. Slemrod and Shobe also estimated a regression that related the
difference between current year realizations and average realizations to the difference between
current year and average tax rates. They also obtain large, but statistical y insignificant results.
They acknowledge that their results may capture transitory effects. Because this study continues a
methodology that has largely been rejected, the results are excluded from Table 1.
Gil ingham and Greenlees (1992)
This study extends a previous times series analysis covering 1954-1985 for a short period
(through 1989) and makes some changes in approaches used by CBO to replicate the results. The
CBO study referenced used tax rates based on predicted gains in a standard regression. The
authors consider three changes. The first is to use an instrumental variables technique that uses
taxes on predicted gains as an instrument (that is, first regress actual effective tax rates on
predicted tax rates and use the fitted values in the regression on realizations). This provision
increased the coefficient from 2.9 to 4.2 and increased the elasticity at a 22% tax rate, from 0.64
to 0.92. Second, they suggested use of the maximum tax rate as an instrument rather than the
predicted tax rate, which increased the coefficient to 5.8 and the elasticity to 1.28. They also
argued that the data should be differenced (a change in realizations related to a change in rates);
differencing produced higher elasticities (1.39 for the instrument with predicted gains and 1.429
for the instrument with the maximum rate) but these elasticities were not statistical y significant
at conventional levels. Differencing may also capture short-term or transitory effects. Final y they
extended the time period through 1989, with and without excluding 1986. Excluding 1986, they
found an estimate of 3.4 rather than 4.2 using the predicted gains instrument and 3.5 when the
data were differenced (corresponding to elasticities of 0.75 and 0.77 at a 22% rate). For the
maximum rate, the values were 5.4 and 5.3 (with and without differencing), corresponding to
elasticities of 1.18 and 1.16. Confining the elasticities under consideration to those in the
extended sample but excluding 1986, the crucial issue is whether to use the predicted gains rate or
the maximum rate as an instrument. It is difficult to know what conclusion to draw from this
study, because the principal conclusion of the authors is that micro-data approaches are superior.
Problems exist with using the maximum rate as an instrument for this time-series regression,
because the law itself changed substantial y over the time period in a way that altered the
relationship between the maximum rate and the average rate. Over this time period, there were
episodes where the maximum rate affected a large fraction of taxpayers and other periods where it
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affected only a smal fraction of taxpayers. Given these reservations about using the maximum
rate, the coefficient of 3.4 is reported in Table 1.
Burman and Randolph (1994)
The Burman and Randolph study was one of the most innovative studies done since the 1980s. It
separated permanent and transitory effects in a short panel (1979-1983) using variations in state
tax rates to identify permanent effects. For the transitory rate, the authors included in their
instruments the first dollar current tax rate, which introduced a transitory element. Thus taxpayers
with unusual y low current income, excluding capital gains (and low current first dollar rates)
would have transitory rates below their permanent rates, whereas those with high income would
have higher rates. The permanent rates would vary across taxpayers in different states due to state
tax rates. The authors estimated an elasticity of 0.18 at an 18% tax rate, which implies a
coefficient of one, and an elasticity of 0.22 at a 22% tax rate. This estimated effect was not
statistical y significant, probably because there was not very much variation in tax rates.34 They
estimated a transitory elasticity of 6.45. Several subsequent studies use across-state variations or
incorporate state tax rates into the analysis.
Bogart and Gentry (1995)
This study also relied on differentials across states to identify permanent responses, but used
aggregate state level gains from 1979 to 1990. The study also uses year dummies to control for
fixed-year effects, so that the basic identification is due largely to the differential in tax rates
across states. The authors report an elasticity of 0.65, which at their reported tax rate reflects a
coefficient of 2.5. For a 22% rate, this coefficient leads to an elasticity of 0.55. The techniques
used in the study should identify a permanent elasticity.
Auerbach and Siegel (2000)
Auerbach and Siegel used panel data from 1985 to 1994 to replicate the Burman and Randolph
results for a different time period. They report an elasticity of 0.33 at the mean of the tax rate.
Unfortunately, they do not report the tax rate. Based on evidence from other sources (Eichner and
Sinai), the tax rate is probably around 25%. Using that tax rate, the coefficient is 1.126 and
suggests an elasticity at a 22% rate of 0.25, very close to the Burman and Randolph results. They
find a transitory elasticity of 4.9 (4.1% at a 22% rate).
Auerbach and Siegel also report an alternative specification in which they add several instruments
to the permanent tax rate including the first dollar tax rate for the current year and the year ahead
maximum statutory rate to a regression on the next year’s tax rate. The permanent elasticity is
much higher, 1.75 rather than 0.33. This magnitude of elasticity is similar to that found in panel
and cross-section studies in the 1980s. The problem with their approach is that this addition of the
current first dollar rate likely adds a transitory element to the permanent tax rate, which explains
their significantly larger elasticity. Thus, the 1.126 coefficient is reported in Table 1.
Auerbach and Siegel also provide a separate regression for the very wealthy and for
“sophisticated” taxpayers (who report sales of more complicated financial products such as
derivatives or report short sales). Their findings using the Burman and Randolph methodology
indicate that there is essential y no response for these taxpayers.

34 When a small coefficient is statistically insignificant, the data may be reliable but the confidence interval includes
zero because it is a small effect. It may be reasonable to conclude that the effect is quite small, and perhaps nonexistent.
When a large coefficient is not statistically significant, it suggests that there is a lo t of uncertainty in the relationship
and the result is not reliable.
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Eichner and Sinai (2000)
This study extends time series analysis through 1997, but finds that it is important to exclude
1986 from the estimates. When 1986 is excluded the coefficient is 2.28, for an elasticity of 0.5.
There is also a case for excluding 1997, although it is not as important. When both are excluded,
the coefficient in a semi-log specification is 2.18, which implies, at a 22% tax rate, an elasticity of
0.48. As in the case of Gil ingham and Greenlees, many specifications are tried. One approach
used an instrumental variables method relying on the top marginal tax rate. This approach led to
an estimate of 3.8, for an elasticity of 0.84. Curiously, the coefficient changes quite substantial y
when 1997 was also excluded, to 5.13 and an elasticity of 1.13. One of the problems of using the
top marginal tax rate is that there are differences between that tax rate and the average tax rate in
the years before 1986 when the tax benefit was an exclusion and rates where more steeply
graduated. The authors also tried some specifications with changes in tax rates. These tended to
lead to elasticities ranging from 0.83 to 1.46. However, in most of these cases some or most of the
tax rate coefficients were not statistical y significant. Moreover, it is more likely that this
approach reflects more transitory elements. Given the problems with using marginal rates and the
instability of specifications with tax rate changes, the 2.28 coefficient is reported in Table 1.
Auten and Joulfaian (2004)
This analysis uses a longer micro-data panel (over 17 years) to estimate permanent and transitory
effects. Although they include state tax rates, they do not use the state tax variation to identify
permanent effects. Their approach is similar to the panel studies of the 1980s in that it uses
adjacent years to separate permanent and transitory effects. Their estimate is lower than most
estimates of short panels from the 1980s, although this lower elasticity may reflect time series
elements. It is likely, however, that the permanent estimate contains transitory elements. They
find an elasticity of 0.72 at an apparent 20% tax rate, which indicates a coefficient of 3.6 and an
elasticity of 0.79 at a 22% tax rate.
Evans (2009)
The Evans study is a basic cross-section regression, relying on the public use file, with a number
of different specifications, leading to elasticities typical y between 2 and 5. Although there are
some issues associated with the public use file data, because tax returns are blended for high-
income taxpayers to protect confidentiality, the main reservation about this study is that it reflects
the fundamental, and now widely recognized, shortcomings of cross-section studies, and the
findings cannot be interpreted as reflecting permanent realizations elasticities. These results are
not reflected in Table 1.
Bakija and Gentry (2014)
This study uses a 50-year panel of state data reflecting changes in combined federal and state tax
rates. The data are aggregated by state, including state- and time-fixed effects. The identification
for the effects comes from changes in effective state marginal tax rates, which are largely
exogenous. The state-fixed effects mean that unobserved differences across states are controlled
for. The authors provide a number of tests of the effects of changing specification, in particular
showing that omitting state-fixed effects and year-fixed effects, separately and together, has
significant effects in raising the elasticities.
Dowd, McClel and and Muthitacharoen (2015)
This study uses standard panel methods using a 10-year panel, although its estimates of transitory
elasticities rely, as with other studies, on adjacent years, which may not be sufficient to eliminate
transitory effects. However, it does have year-fixed effects, which should help control for
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transitory effects from law changes (as opposed to income changes). It also provides considerable
sensitivity analysis with different specifications and time subperiods.
Minas, Lim, and Evans (2018)
This study is an aggregate time series study done with Australian data from 1988 to 2015 and
spans a period which included an exclusion for part of capital gains as wel as changes in
marginal tax rates. It includes controls similar to those in U.S. studies for GDP, inflation, and the
stock market index.
Agersnap and Zidar (2020)
This study uses state data from 1980 to 2016 to estimate responses to state-level changes. The
effect is identified by state tax changes, since the estimates include year fixed effects. This study
is innovative in that it controls for migration among the states, which is important for measuring a
federal-level elasticity. The study estimates elasticities over different time periods, and the
estimates are consistent with a larger short-run response and a smal er long-run response.
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Appendix C. Citations to Studies
Citations to Studies of the 1980s (in Table B-1)
Auerbach, Alan J. “Capital Gains Taxation and Tax Reform.” National Tax Journal (September
1989), pp. 391-401.
Auten, Gerald E. “Capital Gains Taxes and Realizations: Can a Tax Cut Pay for Itself?” Policy
Studies Journal (Autumn 1980), pp. 53-60.
Auten, Gerald E., Leonard E. Burman, and Wil iam C. Randolph. “Estimation and Interpretation
of Capital Gains Realization Behavior: Evidence from Panel Data.” National Tax Journal
(September 1989), p. 353374. (This study was also released by the U.S. Department of Treasury.
OTA Paper 67, May 1989).
Auten, Gerald E. and Charles Clotfelter. “Permanent vs. Transitory Effects and the Realization of
Capital Gains.” Quarterly Journal of Economics (November 1982), pp. 613-632.
Congressional Budget Office. Effects of the 1981 Act on the Distribution of Income and Taxes
Paid. Staff Working Paper. August 1986.
Congressional Budget Office. How Capital Gains Tax Rates Affect Revenues: The Historical
Evidence. March 1988.
Darby, Michael, Robert Gil ingham, and John S. Greenlees. “The Direct Revenue Effects of
Capital Gains Taxation: A Reconsideration of the Time Series Evidence.” Treasury Bulletin, U.S.
Department of Treasury. June 1988.
Feldstein, Martin, Joel Slemrod, and Shlomo Yitzhaki. “The Effects of Taxation on the Sel ing of
Corporate Stock and the Realization of Capital Gains.” Quarterly Journal of Economics (June
1980), pp. 777-791.
Gil ingham, Robert, John S. Greenlees, and Kimberly D. Zieschang. New Estimates of Capital
Gains Realization Behavior: Evidence from Pooled Cross Section Data
. U. S. Department of
Treasury, OTA Paper 66. May 1989.
Jones, Jonathan D. An Analysis of Aggregate Time Series Capital Gains Equations. U. S.
Department of Treasury, Office of Tax Analysis Paper 65. May 1989.
Lindsey, Larry. Capital Gains: Rates, Realizations, and Revenues. National Bureau of Economic
Research, Working Paper 1893. April, 1986.
Minarik, Joseph. “The Effects of Taxation on the Sel ing of Corporate Stock and the Realization
of Capital Gains: Comment.” Quarterly Journal of Economics (February 1984), pp. 93-110.
U.S. Department of Treasury. Office of Tax Analysis. Report to the Congress on the Capital
Gains Tax Reductions of 1978. September 1985.
Citations to Studies Since the 1980s
Agersnap, Ole and Owen Zidar, “The Tax Elasticity of Capital Gains and Revenue-Maximizing
Rates,” forthcoming in the American Economic Review, December 23, 2020. Posted at
https://scholar.princeton.edu/sites/default/files/zidar/files/capgains.pdf.
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Auerbach, Alan J. and Jonathan M. Siegel, “Capital-Gains Realizations of the Rich and
Sophisticated,” American Economic Review, Vol. 90, Papers and Proceedings of the One Hundred
Twelfth Annual Meeting of the American Economic Association, 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
Al ied Social Science Association Meetings, January 8, 2005, December 2004. Posted at
http://www.aeaweb.org/annual_mtg_papers/2005/0109_0800_1204.pdf.
Bakija, Jon M. and Wil iam M. Gentry, Capital Gains Realizations: Evidence from a Long Panel
of State-Level Data
, Working Paper, Wil iams College, June 2014. Posted at
https://web.wil iams.edu/Economics/wp/BakijaGentryCapitalGainsStatePanel.pdf.
Bogart, Wil iam T. and Wil iam 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 Wil iam C. Randolph, “Measuring Permanent Responses to Capital
Gains Tax Change in Panel Data,” American Economic Review, vol. 83 (September 1994), pp.
794-809.
Dowd, Tim, Robert McClel and, and Athiphat Muthitacharoen, “New Evidence on the Elasticity
of Capital Gains,” National Tax Journal, vol. 68, no. 3, September 2015, pp. 511-544.
Evans, Paul, “The Relationship Between Realized Capital Gains and Their Marginal Rate of
Taxation, 1976-2004,” Institute for Research on the Economics of Taxation, Capital Gains Series
no. 2, October 9, 2009. Posted at http://iret.org/pub/CapitalGains-2.pdf.
Eichner, Matthew and Todd Sinai, “Capital Gains Tax Realizations and Tax Rates: New Evidence
from Time Series.” National Tax Journal, vol. 53, no.3, part 2 (September 2000), pp. 663-682.
Gil ingham, Robert and John S. Greenlees, “The Effect of Marginal Tax Rates on Capital Gains
Revenue: Another Look at the Evidence,” National Tax Journal, vol. 45 (June 1992), pp. 167-
177.
Minas, John, Youngdeok Lim, and Chris Evans, “The Impact of Tax Rate Changes on Capital
Gains Realisations: Evidence from Australia,” Australian Tax Forum, accepted for publication
2018.
Slemrod, Joel and Wil iam Shobe, The Tax Elasticity of Capital Gains Realizations: Evidence
from a Panel of Taxpayers
. National Bureau of Economic Research, Working Paper 3237. January
1990. Posted at http://www.nber.org/papers/w3237.pdf.

Author Information

Jane G. Gravelle

Senior Specialist in Economic Policy

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