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The Tax Elasticity of Capital Gains Realizations: Evidence from a Panel of Taxpayers

  • Joel Slemrod
  • William Shobe

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

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3237.

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Date of creation: Jan 1990
Date of revision:
Publication status: published as NTJ, Vol. 42, no. 4 (1989): 503-508.
Handle: RePEc:nbr:nberwo:3237
Note: PE
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  1. Martin Feldstein & Joel Slemrod & Shlomo Yitzhaki, 1981. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains," NBER Working Papers 0250, National Bureau of Economic Research, Inc.
  2. Auten, Gerald E & Clotfelter, Charles T, 1982. "Permanent versus Transitory Tax Effects and the Realization of Capital Gains," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 613-32, November.
  3. Feldstein, Martin & Slemrod, Joel & Yitzhaki, Shlomo, 1984. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains: Reply," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 111-20, February.
  4. Joel Slemrod, 1978. "The Lock-In Effect of the Capital Gains Tax: Some Time Series Evidence," NBER Working Papers 0257, National Bureau of Economic Research, Inc.
  5. Minarik, Joseph J, 1984. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains: Comment," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 93-110, February.
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