EFFECTS OF CAPITAL GAINS TAXES ON REVENUE AND ECONOMIC EFFICIENCY

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Abstract
This paper uses a portfolio-based general equilibrium model and empirical estimates from the literature to simulate the effects on tax revenue and economic efficiency of a 15 percent maximum tax rate on capital gains. In estimating efficiency effects, marginal income tax rates are adjusted to hold tax revenue constant. The results depend on the responsiveness of capital gains realizations and corporate dividend payouts to their respective tax prices. With payouts fixed, efficiency increases but revenue declines except with the highest estimated realizations response. With payouts endogenous, revenue declines. The sign of the efficiency change depends on the realizations response.

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