The Long-Run Impact on Federal Tax Revenues and Capital Allocation of a Cut in the Capital Gains Tax Rate

34 Pages Posted: 23 Aug 2000 Last revised: 5 Feb 2021

See all articles by Patric H. Hendershott

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Yun Hi Won

Ohio State University (OSU); National Bureau of Economic Research (NBER)

Date Written: May 1989

Abstract

Model simulations are run to obtain a range of realistic estimates of the long-run revenue impact of a capital-gains tax-rate cut to a maximum of 15 percent. The basic vehicle for the simulations is a slightly modified version of the Galper-Lucice-Toder (GLT) general equilibrium model. The key behavioral assumptions affecting the estimates are: (1) the portfolio and tangible capital reallocations implicit in the structure of the GLT model, (2) corporate payouts responses based on recent empirical estimates, and (3) illustrative noncorporate recharacterizations of regular income as capital gains. The essential message of this paper is that the strong emphasis in the literation on the realization response to a capital gains tax rate cut has been appropriate. The payout/recharacterization and portfolio redistribution/reallocation effects do not appear to be large. Moreover, the portfolio responses, within the context of the GLT model, act to raise tax revenues (substitution of taxable business capital for tax free household and state and local capital), not lower them as has been conjectured. Thus these responses offset the payout/recharacterization effects, leaving the realization response as basically the total response. Future research could, of course, modify this finding.

Suggested Citation

Hendershott, Patric H. and Won, Yun Hi, The Long-Run Impact on Federal Tax Revenues and Capital Allocation of a Cut in the Capital Gains Tax Rate (May 1989). NBER Working Paper No. w2962, Available at SSRN: https://ssrn.com/abstract=228027

Patric H. Hendershott (Contact Author)

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yun Hi Won

Ohio State University (OSU)

2100 Neil Avenue
Columbus, OH OH 43210
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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