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The Impact of the Estate Tax on Capital Gains Realizations: Evidence from the Taxpayer Relief Act of 1997: Working Paper 2010-08

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  • Athiphat Muthitacharoen
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    Abstract

    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.

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    File URL: http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/119xx/doc11979/2010-08-estatetaxandcapitalgains.pdf
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    Bibliographic Info

    Paper provided by Congressional Budget Office in its series Working Papers with number 21941.

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    Date of creation: 23 Nov 2010
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    Handle: RePEc:cbo:wpaper:21941

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    1. B. Douglas Bernheim & Robert J. Lemke & John Karl Scholz, 2001. "Do Estate and Gift Taxes Affect the Timing of Private Transfers?," NBER Working Papers 8333, National Bureau of Economic Research, Inc.
    2. Hurd, Michael D, 1990. "Research on the Elderly: Economic Status, Retirement, and Consumption and Saving," Journal of Economic Literature, American Economic Association, vol. 28(2), pages 565-637, June.
    3. Burman, Leonard E & Randolph, William C, 1994. "Measuring Permanent Responses to Capital-Gains Tax Changes in Panel Data," American Economic Review, American Economic Association, vol. 84(4), pages 794-809, September.
    4. Auten, Gerald E. & Burman, Leonard E. & Randolph, William C., 1989. "Estimation and Interpretation of Capital Gains Realization Behavior: Evidence from Panel Data," National Tax Journal, National Tax Association, vol. 42(3), pages 353-74, September.
    5. Lee, Lung-fei & Maddala, G S & Trost, R P, 1980. "Asymptotic Covariance Matrices of Two-Stage Probit and Two-Stage Tobit Methods for Simultaneous Equations Models with Selectivity," Econometrica, Econometric Society, vol. 48(2), pages 491-503, March.
    6. Auten, Gerald & Joulfaian, David, 2001. "Bequest taxes and capital gains realizations," Journal of Public Economics, Elsevier, vol. 81(2), pages 213-229, August.
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