Thread by @LHSummers

1. New NBER WP out today, “Rethinking How We Score Capital Gains Tax Reform” with @NatashaRSarin, @omzidar, and Eric Zwick.

We point out that there is likely much more revenue potential from raising capital gains rates than official scorekeepers believe. nber.org/papers/w28362?…

2. Elasticity of capital gains tax base to rate changes is assumed to be .7.

This is unchanged since the 80s, and means that raising cap gains rates to ordinary income levels puts you on the wrong side of the Laffer curve.

We believe this conclusion is mistaken.

3. Why? Estimates appear to miss that realizations deferred when rates rise unlikely to be deferred indefinitely

And when they are realized, taxed at new higher rates

Suppose doubling cap gains rates cuts realizations in half, e.g. occur once every 2 years rather than annually

4. If assets grow at 10%, then $100 of assets = $10 of gain in year 1

In high tax regime, $100 = $0 of gain in year 1 and $21 in year 2

Short-run revenue score zero, med.-run is double the baseline

Latter is relevant 4 policy purposes, b/ existing estimates focus on short-run

5. Also composition of cap gains shifted:

Today, nearly half of gains are passthrough & mutual fund distributions outside of taxpayer control

Even in extreme case w/ timeable gains shrinking to zero when rates rise, large stock of gains will be taxed regularly at higher rates

6. Crude estimates suggest raising cap gains rates to ordinary income level could raise more than $1T in decade

Rate increases + broadening tax base—e.g. by eliminating stepped-up-basis & preference for charitable gifts of appreciated assets—further increases revenue potential

7. Come from a position of deep respect for scorekeeping community

Given magnitudes at stake, we hope methods they employ to evaluate cap gains proposals can be made more transparent

And subject of review and debate btwn experts at JCT, Treasury & broader academic community