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Capital Gains Taxation and Realizations: Evidence from Interstate Comparisons

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  • William T. Bogart
  • William M. Gentry

Abstract

Despite numerous studies of the relation between income taxes and capital garns realizations, the revenue consequences of reducing capital gains tax rates remain unclear. However, an important source of cross-sectional variation has been neglected in this line of research: since both the tax base and the tax rate vary among states, the marginal tax rate on capital gains differs among otherwise identical individuals located in different states. The interstate variation in the tax consequences of realizing capital gains implies that the incentive to realize gains varies across states. This paper documents the interstate variation in capital gains taxation and examines the relation between capital gains taxes and aggregated state-level realizations. For each state, we construct marginal tax rates on capital gains for the highest state income tax bracket for 1982 through 1990. Using state-level aggregated data rather than data on individual taxpayers alleviates the problem that the marginal tax rate is endogenous to the amount of capital gains realized. Panel estimates indicate that capital gains realizations are negatively related to capital gains tax rates. The estimated elasticity is smaller than that found by most researchers using panel data, with a point estimate of - 0.67 in our basic specification.

Suggested Citation

  • William T. Bogart & William M. Gentry, 1993. "Capital Gains Taxation and Realizations: Evidence from Interstate Comparisons," NBER Working Papers 4254, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4254 Note: PE
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    References listed on IDEAS

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    1. Lynn E. Browne, 1992. "Why New England went the way of Texas rather than California," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 23-41.
    2. Martin Feldstein & Joel Slemrod & Shlomo Yitzhaki, 1980. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains," The Quarterly Journal of Economics, Oxford University Press, vol. 94(4), pages 777-791.
    3. Auten, Gerald E. & Burman, Leonard E. & Randolph, William C., 1989. "Estimation and Interpretation of Capital Gains Realization Behavior: Evidence From Panel Data," National Tax Journal, National Tax Association, vol. 42(3), pages 353-374, September.
    4. Auten, Gerald E. & Burman, Leonard E. & Randolph, William C., 1989. "Estimation and Interpretation of Capital Gains Realization Behavior: Evidence from Panel Data," National Tax Journal, National Tax Association, vol. 42(3), pages 353-74, September.
    5. Lawrence B. Lindsey, 1987. "Capital Gains Rates, Realizations, and Revenues," NBER Chapters,in: The Effects of Taxation on Capital Accumulation, pages 69-100 National Bureau of Economic Research, Inc.
    6. Gerald E. Auten & Charles T. Clotfelter, 1982. "Permanent versus Transitory Tax Effects and the Realization of Capital Gains," The Quarterly Journal of Economics, Oxford University Press, vol. 97(4), pages 613-632.
    7. Joel Slemrod & William Shobe, 1990. "The Tax Elasticity of Capital Gains Realizations: Evidence from a Panel of Taxpayers," NBER Working Papers 3237, National Bureau of Economic Research, Inc.
    8. Alan J. Auerbach, 1988. "Capital Gains Taxation in the United States: Realizations, Revenue, and Rhetoric," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 595-638.
    9. Joseph J. Minarik, 1984. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains: Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 99(1), pages 93-110.
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    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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