An official website of the United States government
This paper uses a direct-projections approach to estimate the effect of capital gains taxation on realizations at the state level and then develops a framework for determining revenue-maximizing rates at the federal level. We find that the elasticity of revenues with respect to the tax rate over a 10-year period is −0.5 to −0.3, indicating that capital gains tax cuts do not pay for themselves and that a 5 percentage point rate increase would yield $18 to $30 billion in annual federal tax revenue. Our long-run estimates yield revenue-maximizing capital gains tax rates of 38 to 47 percent. (JEL E62, H25, H71)
more »
« less
Should We Tax Capital Income or Wealth?
We study optimal capital income and wealth taxation in an economy that reproduces the importance of private businesses for output and inequality. If entrepreneurs are subject to collateral constraints, they face heterogeneous rates of return, which generate a meaningful distinction between capital income and wealth taxation. We find that taxing capital income is preferable to taxing wealth because the efficiency gains from wealth taxation are swamped by the redistributional benefits of taxing the profits of richer entrepreneurs. Consequently, the gains from taxing wealth are modest. This conclusion is robust to the planner’s preference for redistribution and allowing for nonlinear taxes. (JEL D31, H21, H23, H24, H25, K34, L26)
more »
« less
- Award ID(s):
- 1948119
- PAR ID:
- 10498085
- Publisher / Repository:
- American Economic Review: Insights
- Date Published:
- Journal Name:
- American Economic Review: Insights
- Volume:
- 5
- Issue:
- 2
- ISSN:
- 2640-205X
- Page Range / eLocation ID:
- 259 to 274
- Format(s):
- Medium: X
- Sponsoring Org:
- National Science Foundation
More Like this
-
-
Abstract This article uses administrative tax data to estimate top wealth in the United States. We assemble new data that link people to their sources of capital income and develop new methods to estimate the degree of return heterogeneity within asset classes. Disaggregated fixed-income data reveal that rich individuals earn much more of their interest income in higher-yielding forms and have much greater exposure to credit risk. Consequently, in recent years, the interest rate on fixed income at the top is approximately 3.5 times higher than the average. We value the population of U.S. firms using firm-level characteristics and apportion this wealth using firm-owner links. We combine this new data on fixed income and pass-through business returns with refined estimates of C-corporation equity, housing, and pension wealth to deliver new capitalized wealth estimates that build upon the methods of Saez and Zucman (2016a). From 1989 to 2016, the top 1%, 0.1%, and 0.01% wealth shares increased by 6.6, 4.6, and 2.9 percentage points, respectively, to 33.7%, 15.7%, and 7.1%. Overall, although we estimate a large degree of return heterogeneity, accounting for this heterogeneity does not change the fundamental story for top wealth shares and their growth—wealth inequality is high and has risen substantially over recent decades.more » « less
-
Imbens, Guido W (Ed.)We study the effect of interest rates on wealth inequality. While lower rates decrease the growth rate of rentiers, they also increase the growth rate of entrepreneurs by making it cheaper to raise capital. To understand which effect dominates, we derive a sufficient statistic for the effect of interest rates on the Pareto exponent of the wealth distribution: it depends on the lifetime equity and debt issuance rate of individuals in the right tail of the wealth distribution. We estimate this sufficient statistic using new data on the trajectory of top fortunes in the U.S. Overall, we find that the secular decline in interest rates (or more generally of required rates of returns) can account for about 40% of the rise in Pareto inequality; that is, the degree to which the super rich pulled ahead relative to the rich.more » « less
-
Consumption Insurance against Wage Risk: Family Labor Supply and Optimal Progressive Income Taxationnull (Ed.)We show that a calibrated life cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri, and Saporta-Eksten (2016) in US data. In the model, 35 percent of male and 18 percent of female permanent wage shocks pass through to consumption, compared to the empirical estimates of 32 percent and 19 percent. Most of the consumption insurance against permanent male wage shocks is provided through the presence and labor supply response of the female earner. Abstracting from this private intrahousehold income insurance mechanism strongly biases upward the welfare losses from idiosyncratic wage risk as well as the desired extent of public insurance through progressive income taxation. Relative to the standard one-earner life cycle model, the optimal degree of tax progressivity is significantly lower and the welfare gains from implementing the optimal system are cut roughly in half. (JEL D15, H21, H24, J16, J22, J31)more » « less
-
Abstract The structure of taxes and their burden have undergone large and frequent changes over time. We provide a brief history of U.S. federal income tax reform since the 1960s, calculate effective federal income tax rates for each wave of the Panel Study of Income Dynamics, and discuss how effective taxation changed from 1969 to 2016. We show that most tax regimes are short-lived and that the variation in taxes over time and across groups is large. We also use an estimated dynamic model of couples and singles to show that the various tax regimes that we estimate imply very different labor market and saving behavior. These findings stress the importance of studying and modeling tax changes over time and across groups.more » « less
- Free Publicly Accessible Full Text
-
Accepted Manuscript1.0
- Journal Article:
- https://doi.org/10.1257/aeri.20220192
