Net Capital Gains Across Zip Codes

Abstract
This brief examines net capital gains realizations by utilizing zip-code level data on taxes and demographics. This data can help shed light on direct beneficiaries of preferential capital gains tax rates beyond the standard distributional tables based solely on income. In particular, this brief highlights the extent to which the benefits are concentrated among zip codes, and the limited benefits of preferred rates for certain geographic regions. We focus on the relationship between capital gains and Adjusted Gross Income (AGI), the demographic characteristics of zip codes with a particularly high percent of tax returns reporting capital gains, and the average capital gains reported across counties.

INTRODUCTION

Capital gains are the profits from sales of capital assets, such as corporate stock, real estate, or businesses. The taxation of capital gains is exceptionally complex, with a separate schedule of tax rates depending on taxpayers’ marginal income tax bracket and length of asset ownership, type of asset, and other factors. Long-term capital gains, which apply to assets held for more than one year, enjoy preferential treatment under the tax code. Between 2004 and 2012, top statutory tax rates on most long-term capital gains were at the lowest levels since the Great Depression. Taxpayers above the 15 percent individual income tax bracket faced a 15 percent capital gains tax rate, while taxpayers in the 15 percent tax bracket or below faced a capital gains tax rate of zero. Beginning in January 2013, the tax rates on both short-term and long-term capital gains rose for high-income taxpayers.

Capital gains taxes, including the tax preference for income classified as capital gains, introduce a host of distortions and complexities. Notable economic impacts of capital gains taxation include a “lock-in” effect (i.e., disincentive to realize capital gains), incentives to shelter income away from income taxation, and a “double tax” on corporate profits. While the responsiveness of capital gains realizations to capital gains tax rates is subject to debate, one prominent study showed that the impact is primarily constrained to the short-run.

The goal of this brief is to examine net capital gains realizations2 by utilizing zip-code level data on taxes and demographics. This data can help shed light on direct beneficiaries of preferential capital gains tax rates beyond the standard distributional tables based solely on income. In particular, this brief highlights the extent to which the benefits are concentrated among zip codes, and the limited benefits of preferred rates for certain geographic regions. In the following sections—which are based on 2012 data, the most recent year for which data are available—we focus on the relationship between capital gains and Adjusted Gross Income (AGI), the demographic characteristics of zip codes with a particularly high percent of tax returns reporting capital gains, and the average capital gains reported across counties.