crs_reports: R41364

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R41364 Capital Gains Tax Options: Behavioral Responses and Revenues 2026-03-03T05:00:00Z 2026-03-04T12:53:13Z Active Reports Jane G. Gravelle   Compared with most other tax provisions, the potential revenue gain scored for an increase in capital gains taxes is strongly affected by behavioral responses assumed by the Joint Committee on Taxation (JCT) and the Department of the Treasury. As an illustration, the Obama Administration estimated in February 2010 that allowing the 2003 tax cuts enacted in the George W. Bush Administration for capital gains to expire would have raised $16 billion of revenue in FY2019. Yet, based on Congressional Budget Office (CBO) projections in January 2010, the effective capital gains tax was 13.3% in 2008 and would have increased to 17.9% in 2019; applying the differential in these rates to the realizations in 2019 would have produced a revenue difference of $40 billion. Although some of this differential could arise from different forecasts, assumptions about behavioral responses are the main reason for the reduction in projected revenues. Because these behavioral responses limit the potential revenue scored from a tax increase on capital gains and because of concerns some have raised that most income of very high-income individuals is in the form of capital gains (whether accrued or realized), proposals have been advanced to tax capital gains currently (as accrued) by marking to market publicly traded securities and imposing a look-back tax on difficult-to-value assets. Such a change could face a number of difficulties; thus it is important to understand the evidence of the behavioral responses. The analysis in this report suggests the Department of the Treasury’s projections and those of the JCT, absent a change in their realizations response, may understate revenue gains from increasing capital gains tax rates. Realizations responses in revenue projections by the revenue-estimating agencies (Joint Committee on Taxation and Treasury) were publicly discussed at the end of the 1980s, in the midst of a contentious debate. The larger the absolute value of the elasticity (the percentage change in realizations divided by the percentage change in taxes), the smaller the revenue gain; with elasticities larger than one in absolute value, a loss would occur. Estimated elasticities in the literature prior to 1990 ranged from 0.3 to almost 3.8, leaving limited guidance for revenue-estimating agencies. JCT used an elasticity of 0.76, whereas Treasury used an elasticity of one. At the time, concerns were raised that there were serious problems with this evidence. Perhaps the most significant concern was that larger results from studies of individuals reflected a timing or transitory response (high-income taxpayers with variable income chose to realize gains when tax rates were temporarily low). This transitory response is not appropriate for assessing a permanent change. Data analysis and studies since that time suggest the permanent elasticity is considerably lower than it appeared in 1990. The surge in realizations in 1986 as a capital gains tax rate increase was preannounced provided compelling evidence of the importance of a transitory response. A 2025 CRS analysis of the limits of realizations (which cannot exceed accruals in the long run) suggested a maximum long-run (or permanent) capital gains elasticity is between 0.29 to 0.45 in absolute value (elasticities are negative), with an estimate at the midpoint of positive transaction costs of 0.34. At a 0.34 elasticity, the revenue-maximizing tax rate would be 65%. This estimate for the capital gains elasticity assumes that in the absence of taxes and transactions costs all gains would be realized every year. This assumption is likely high, as there are numerous reasons aside from taxes and trading costs that would cause individuals to retain assets. If instead it is assumed that 80% of gains would be realized, the maximum elasticity ranges from 0.22 to-0.16 for positive transactions costs, with an estimate at the midpoint of positive transactions costs of 0.19. Several new econometric studies, using new techniques to isolate the permanent response, suggested elasticities of around 0.5 or less. Other recent studies suggested larger responses. The JCT appears to maintain its original assumption, and Treasury’s response has been reduced to be similar to JCT’s; both appear to exceed the realizations limit. CRS simulations indicate an increase in capital gains tax rates of five percentage points would have raised $69 billion on a static basis for 2025, about $55 billion using the 0.34 elasticity and $44 billion using the 0.19 elasticity. The JCT estimates likely would be around $20 billion, reflecting a 0.68 elasticity. Taxing gains on an accrual basis would eliminate this response in the long run and gain additional revenues on currently unrealized gains. https://www.congress.gov/crs_external_products/R/PDF/R41364/R41364.14.pdf https://www.congress.gov/crs_external_products/R/HTML/R41364.html

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