November 23, 2010
This study investigates the effects of the estate tax on decisions to realize capital gains. It identifies the effects on realization decisions through the changes in the estate tax exemption level introduced by the Taxpayer Relief Act of 1997 (TRA97). Using data from the Survey of Consumer Finance (SCF), the analysis focuses on changes in capital gains realization by households that were affected by an increase in the estate tax exemption level. Applying the generalized Tobit procedure that corrects for sample selection and endogeneity in tax variables, the study finds that those households realized significantly lower gains relative to households that were not affected. The study also finds that the capital gains lock-in effects resulting from estate tax changes in TRA97 are likely confined to households that would have had some capital gains income under prior law, and that the effects do not appear to induce more households to sell assets. These findings support the hypothesis that the presence of the estate tax helps unlock capital gains realization. The results are robust to a number of alternative specifications.