Death and taxes: An evaluation of the impact of prospective policies for taxing wealth at the time of death

We study the efficacy of a capital gains tax relative to the current estate tax. Using wealth data on U.S. households, we forecast changes in household wealth and calculate the importance of untaxed wealth in bequeathed estates. We then compare the aggregate and distributional burden of the current estate tax to policies in which only unrealized capital gains are subject to tax. We estimate that, in the coming decade, unrealized capital gains will comprise nearly half of the gross estate for estates worth over $50 million. Policies taxing capital gains can potentially raise more revenue than the current estate tax, but not without a substantial increase in the fraction of households facing a tax. Due to the high concentration of unrealized gains among the wealthy, we find that, although a modest capital gains allowance substantially reduces tax revenue, it sharply focuses the tax burden on the wealthiest households.