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Session Overview
Session
K03: Capital Taxes
Time:
Friday, 20/Aug/2021:
12:30pm - 2:00pm


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Presentations
12:30pm - 12:52pm

Permanent and Transitory Responses to Capital Gains Taxes: Evidence from a Lifetime Exemption in Canada

Adam Lavecchia1, Alisa Tazhitdinova2

1McMaster University; 2University of California, Santa Barbara

Using panel data on a 20% random sample of Canadian taxpayers, we study behavioral responses to the cancellation of a lifetime capital gains exemption that resulted in increased capital gains taxation for some individuals. The unique setting allows us to distinguish between short-term avoidance responses and permanent responses to capital gains taxes. We show that the exemption did not change the number of taxpayers reporting positive capital gains, and thus unlikely resulted in increased participation in capital markets. However, the exemption cancellation slightly increased capital gains realizations of the existing traders.

Lavecchia-Permanent and Transitory Responses to Capital Gains Taxes-206.pdf


12:52pm - 1:15pm

The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates

Ole Agersnap, Owen Zidar

Princeton University, United States of America

This paper uses a direct-projections approach to estimate the effect of capital gains taxation on realizations at the US 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 ten-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.

Agersnap-The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates-200.pdf


1:15pm - 1:37pm

Estimating the Laffer Tax Rate on Capital Income: Cross-base Responses Matters

Marie-Noëlle Lefebvre1, Etienne Lehmann1, Michael Sicsic1,2

1CRED(TEPP), Université Paris II Panthéon-Assas, France; 2Insee

We derive a formula to estimate the Laffer tax rates on capital income. Our theory clarifies what sufficient statistics need to be estimated: the "direct" elasticity of capital income and the "cross" elasticity of labor income with respect to the net-of-tax rate on capital income. We estimate these elasticities using reforms between 2008 and 2017 in France. We obtain a direct elasticity around 0.66, wich alone, would lead to a Laffer rate around 60%. However, since labor incomes are much larger than capital incomes, the Laffer tax rate is especially sensitive to the cross elasticity. We estimate this cross elasticity to be positive in France, which contradicts micro-foundations of this cross elasticity that relies on income shifting but which is in line with micro-foundations from two-period labor and savings models. Our estimate for the cross base elasticity dramatically decreases the Laffer rate which can be reduced down to 20%.

Lefebvre-Estimating the Laffer Tax Rate on Capital Income-336.pdf


1:37pm - 2:00pm

The Psychology of Taxing Capital Income: Evidence from a Survey Experiment on the Realization Rule

Zachary Liscow1, Edward Fox2

1Yale University, United States of America; 2University of Michigan, United States of America

The realization rule is central to income taxation, but often decreases the efficiency, equity, and simplicity of taxation. So it is surprising that we do not have a good explanation for why the rule exists for liquid assets. Scholars have long speculated about the role of the public’s views here, but little is known empirically about them. We conduct the first survey experiment to understand the psychology of taxing gains on unsold assets. We have three main findings. First, respondents are far less supportive of taxing gains in unsold publicly-traded stock than sold stock. Second, informing people of the arguments on “both sides” of taxing unsold stock considerably decreases support (by 19 percentage points) for taxing unsold stock. And, third, addressing respondents’ stated reasons for opposing taxing unsold gains does not change their mind, suggesting that a deep intuition, perhaps driven by mental accounting, may be driving respondents’ opposition.

Liscow-The Psychology of Taxing Capital Income-548.pdf


 
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