Working Paper Series 

Congressional Budget Office 

Washington, D.C. 

The Impact of the Estate Tax on 

Capital Gains Realizations: 

Evidence from the Taxpayer Relief Act of 1997 

Athiphat Muthitacharoen (athiphatm@cbo.gov) 

Tax Analysis Division 

Congressional Budget Office 

Washington, D.C. 

Working Paper 2010-08 

Working papers in this series are preliminary and are circulated to stimulate discussion 

and critical comment. These papers are not subject to CBO’s formal review and editing 

processes. The analysis and conclusions expressed in them are those of the author and 

should not be interpreted as those of the Congressional Budget Office. References in 

publications should be cleared with the author. Papers in this series can be obtained at 

www.cbo.gov/publications. 

I am grateful to Janet Holtzblatt, Larry Ozanne, Bill Randolph, and Frank Sammartino 

from the Congressional Budget Office; Gerald Auten and David Joulfaian from the 

Office of Tax Analysis of the U.S. Department of the Treasury; Alan J. Auerbach from 

the University of California, Berkeley; James Poterba from the Massachusetts Institute of 

Technology; Robert Lemke from Lake Forest College, and John Karl Scholz from the 

University of Wisconsin–Madison for many invaluable comments and suggestions. 

 
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.
1 

1. Introduction 

Much attention has focused on the impact of the individual income tax on 

taxpayers’ decisions to realize capital gains. However, the estate tax may also affect those 

decisions. This study examines the effects of estate taxation on decisions to realize capital 

gains by analyzing the responses of households’ decisions to the Taxpayer Relief Act of 

1997 (TRA97), which gradually increased the amount of the estate that is exempt from 

the tax from $600,000 to $1 million. 

Under current law (except in 2010), capital gains that were never realized during 

the taxpayer’s life completely escape income tax. Under those circumstances, ownership 

of the asset passes to the heir, and its tax basis is increased (or “stepped up”) to equal its 

market value at the time of the taxpayer’s death–thus effectively eliminating any income 

tax liability on the capital gains that accrued from the time the taxpayer obtained the asset 

to the time of his or her death. The step-up in basis, then, may create an incentive for 

taxpayers to hold assets until death to avoid taxation–locking in capital gains realizations 

as a consequence. 

By taxing the current value of inherited assets (in excess of the exemption level), 

the estate tax provides a backstop to the loss in income tax revenues that result from the 

step-up in basis. For wealthy taxpayers, the estate tax may unlock capital gains by 

making the sale of assets to finance consumption relatively more attractive than holding 

those assets as a bequest to heirs. Moreover, when the capital gains tax is viewed as a 

transaction cost for adjusting portfolios, the estate tax effectively lowers the transaction 

cost and thus stimulates capital gains realizations. 

This study tests whether the rise in the estate tax exemption level from $600,000 

to $1 million, resulting from TRA97, increases the capital gains lock-in effects. I use data 

from the Survey of Consumer Finances (SCF), which contains households headed by 

individuals who, given their age, would reasonably expect to continue to live for a 

number of years. That feature of the data could be important, because it is possible that 

taxpayers engage in estate tax planning—in particular, by adjusting their portfolios and 

realizing capital gains—well before they near the end of their lives. During the time 
2 

period chosen (1989 to 2007), TRA97 would have caused estate tax expectations across 

the SCF households to change for at least some portion of the population. 

This study also addresses several econometric concerns. It is likely that those 

households that realized capital gains were not randomly selected from the population. In 

addition, the progressivity of the income tax schedule implies that the capital gains tax 

rate variable is endogenous to the realization decision. To account for these sample 

selection and endogeneity problems, I follow Burman and Randolph (1994) by 

employing a generalized Tobit model. This estimation procedure allows for use of an 

instrumental variable in place of the capital gains tax rate and allows for the effects of 

explanatory variables to differ between the decision of whether to realize capital gains 

and the choice over the amount of gains realized. 

The findings of this study support the hypothesis that the presence of estate 

taxation helps unlock capital gains realizations. Specifically, I find that households that 

experienced the largest reductions in their estate tax price realized significantly lower 

amounts of gains relative to the households that were not affected. The capital gains lockin effects are likely confined to households that would have had some capital gains 

income under prior law, rather than inducing more households to sell assets and realize 

capital gains. This finding may be due to differences in the transaction costs associated 

with portfolio adjustment between the households that had capital gains income and those 

that did not. Another possible explanation for that finding is that households that would 

have had some capital gains income, even in the absence of the provision, may be more 

tax-savvy than other households. The findings are reasonably robust to alternative 

specifications. 

Section 2 discusses related studies. Section 3 describes the background on 

relevant estate and capital gains tax law. Sections 4 and 5 illustrate model specification, 

estimation method, and the dataset used in this study. The empirical results and 

sensitivity analyses are shown in Section 6. Section 7 presents the conclusions. 
3 

2. Previous Studies 

The extensive empirical literature on the capital gains realization decision has 

been influenced by the seminal work of Feldstein, Slemrod and Yitzhaki (1980), who 

studied the effects of taxation on the sale of corporate stock.1

 Using cross-section data 

which oversampled high-income taxpayers and contained detailed information on asset 

sales, they found that the capital gains realization of corporate stock is highly responsive 

to the marginal tax rate. 

Since then, many other studies have examined the elasticity of gains realization, 

using new approaches that yield much lower elasticity estimates than those found in the 

original study. For example, Burman and Randolph (1994) purged the estimation of 

intertemporal substitution by using the sum of the maximum federal tax rate and the 

maximum state tax rate (for a taxpayer’s residence) as an instrument for the permanent 

tax rate. They argued that such an instrument is uncorrelated with transitory variations in 

individuals’ income. Their findings suggest that the long run response to the capital gains 

tax rate change is much smaller than the transitory response. 

More recently, Auerbach and Siegel (2000) allowed for heterogeneity among 

taxpayers by distinguishing the responses of the wealthy and the financially sophisticated 

taxpayers from those who were less wealthy or financially sophisticated.2

 They found 

that wealthier taxpayers exhibit significantly lower long-run responses to changes in 

capital gains tax rate than other taxpayers—suggesting closer adherence to capital gains 

tax avoidance strategies that emphasize arbitrage based on tax rate differentials. The 

responsiveness of the financially sophisticated taxpayers exhibited a similar pattern. 

Auten and Joulfaian (2001) conducted the first empirical study that explicitly 

considered the effects of the estate tax on the decision to realize gains. They employed a 

dataset that matches a sample of federal estate tax returns for 1982 decedents with their 

1980 and 1981 federal income tax returns. Their dataset straddles the Economic 

Recovery Tax Act of 1981, which reduced tax rates on both capital gains and estates. 

 

1

 For complete review of the literature on capital gains taxation, see Zodrow (1993) and Gravelle (2010). 

2

 Auerbach and Siegel identified the financially sophisticated taxpayers as those who reported the sale of at 

least one option, commodity, or futures contract, or who engaged in a short-sale transaction at any time 

during the panel period. 
4 

Using the standard model that corrected for the endogeneity of both capital gains tax rates 

and estate tax rates, they found that the estate tax has a significant unlocking effect on 

realizations of capital gains with an implied elasticity of 0.36.3

 Their result is robust to a 

number of specifications. The estate taxes have the largest effects on realizations for 

individuals between 75 and 84 years old, with no effect for those over 85 years old or 

under 50 years old. 

One of the critical features of Auten and Joulfaian’s study was that the sample 

was restricted to taxpayers who were within one or two years of their death. As a result of 

this restriction, the mean age in their sample is approximately 75 years old. It is possible 

that the sample included many people—who, because of their age or their state of health, 

were aware that they might be approaching the end of their life and adjusted their estate 

planning accordingly.4

 

Estate tax planning—in particular, portfolio adjustment and realizations of capital 

gains—may be taken well before taxpayers enter the final years of their lives. This 

hypothesis is supported by several studies, which find that young taxpayers take into 

account their expected estate tax liabilities when deciding whether to transfer gifts to 

relatives and charities during their lifetime. 

For example, Bernheim et al. (2004) used the Survey of Consumer Finances from 

1989 to 2001 to investigate the effects of estate and gift taxation on the timing of private 

transfers. They restricted the sample to households whose heads were between the ages of 

50 and 79, resulting in a sample with an average age of 61—significantly younger than 

that in the sample used by Auten and Joulfaian. Bernheim et al. examined the impact of 

TRA97, which increased the unified lifetime exemption of estate and gift taxes from 

$600,000 to $1 million. Despite the unified lifetime exemption, it was generally more 

advantageous under pre-TRA97 law for taxpayers to give to heirs during their lifetimes 

 

3

 Auten and Joulfaian also estimated a generalized Tobit model and found that the estimated coefficient on 

the estate tax rate from the level equation is statistically significant and thus consistent with their standard 

Tobit result. 

4 Of course, not everyone in the sample would have reason to believe that death was imminent. For 

example, about 20 percent of the sample were individuals who were under the age 65. It is possible that 

younger members of the sample—particularly if they believed that they were healthy—did not expect death 

to be imminent and thus did not engage in estate tax planning. The tax return data, however, do not contain 

information on health status or cause of death. 
5 

than to bequest those amounts at death—in part because of the exemption from taxation 

of annual gifts of up to $10,000 for each recipient and the exclusion of those gifts from 

the unified lifetime exemption. Increasing the lifetime exemption eliminated exposure to 

estate taxation for some households and thus lowered the tax disadvantage of bequests 

compared with gifts from those households. If the price effect (resulting from a reduction 

in the effective marginal gift and estate tax rate) is sufficiently strong, this will lower 

those households’ incentives to make inter vivos transfers (that is, gifts made during the 

giver’s lifetime).5

 Bernheim et al. found that TRA97 significantly lowered the likelihood 

of inter vivos transfers for households whose exposure to estate taxation was reduced the 

most relative to the households whose exposure was unaffected. Their findings therefore 

suggest that the timing of transfers is responsive to applicable estate and gift tax rates. 

 A second study of the effects of the estate tax included younger households. 

Greene and McClelland (2001) examined the effects of the estate tax on charitable 

contributions using the 1992 wave of the Health and Retirement Study survey. Using 

only observations from the primary respondents, their sample’s average age is about 56. 

They calculated the expected value of an individual’s estate and the applicable estate tax 

rate under several scenarios of asset growth. They found that the estate tax has a 

significant impact on charitable contributions, with the elasticity ranging from 0.30 to 

0.69. Given the big difference in the estate tax rates between those who were not subject 

to the estate tax and those who were, they suggest that this elasticity estimate may be 

interpreted as the elasticity for being subject to the estate tax rather than the elasticity for 

marginal changes in the estate tax rate. 

3. Background on Relevant Estate Tax and Capital Gains Tax Law 

This study identifies the effects of estate taxation through the changes in the estate 

tax exemption level introduced by the Taxpayer Relief Act of 1997. The federal estate tax 

is levied on the net value of assets transferred to individuals, other than the surviving 

spouse, upon a person’s death. Under the law prior to TRA97, the unified credit shielded 

 

5

 However, if the wealth effect (resulting from an increase in after-tax wealth) dominates, and gift-giving is 

a normal good, the incentive for making inter vivos transfers will increase. 
6 

from taxation any combination of a decedent’s taxable estate and a decedent’s lifetime 

taxable gifts up to $600,000 from tax.6

 The graduated estate tax rate schedule ranged 

from 37 to 55 percent. In addition, there was a 5 percent surtax levied on taxable estates 

from $10 million to $21.04 million. Its purpose was to reclaim the benefit of the 

graduated tax rates below 55 percent. 

TRA97 reduced the estate tax in a series of steps. It raised the unified credit for the 

first time since 1981. As a result of the scheduled gradual increase in the credit, the 

effective exemption level would have increased from $625,000 in 1998 to $1 million in 

2006. TRA97 also slightly modified the surtax provision so that the 5 percent surtax was 

levied on taxable estates from $10 million to $17.184 million. 

Although the focus of this study is the effect of the 1997 tax law, the study period 

includes years following the enactment of the Economic Growth and Tax Relief 

Reconciliation Act of 2001 (EGTRRA). Beginning in 2002, EGTRRA phased out the 

estate tax gradually, repealing it entirely for 2010 decedents. The gradual increase in the 

unified credit resulted in the effective exemption level rising from $1 million in 2002 to 

$3.5 million in 2009.7

 In a series of steps, EGTRRA also lowered top marginal tax rates 

from 55 percent to 45 percent by 2007. The 5 percent surtax was also repealed starting 

from 2002. The provisions of EGTRRA are scheduled to sunset at the end of 2010. In 

2011, the estate tax will revert to what it would have been under TRA97. Table 1 

summarizes top marginal estate tax rates and estate tax exemption levels from 1989. 

 

 

6

 A fixed credit, known as the unified credit, effectively exempts a certain portion of each estate from tax. 

The effective exemption also serves as the tax-filing threshold. An estate tax return must be filed if the 

gross value of the estate exceeds the exemption for the year of death. In order to determine the value of the 

taxable estate, deductions for the gross estate are allowed for spousal bequests, charitable bequests, debts 

and mortgages owed, funeral expenses and costs of administering the estate. 

7

 The exemption for cumulative lifetime gifts, however, remained capped separately at $1 million. The gift 

tax also remains in place in 2010 while the estate tax is repealed. 
7 

Table 1: Top Marginal Estate Tax Rates and 

Estate Tax Exemption Amounts from 1989 

Year of Death Top Marginal Tax Rate (%) Estate Tax Exemption 

1989 - 1997 55 $600,000 

 TRA97 EGTRRA TRA97 EGTRRA 

1998 55 n/a $625,000 n/a 

1999 55 n/a $650,000 n/a 

2000 55 n/a $675,000 n/a 

2001 55 n/a $675,000 n/a 

2002 55 50 $700,000 $1 million 

2003 55 49 $700,000 $1 million 

2004 55 48 $850,000 $1.5 million 

2005 55 47 $950,000 $1.5 million 

2006 55 46 $1 million $2 million 

2007 55 45 $1 million $2 million 

2008 55 45 $1 million $2 million 

2009 55 45 $1 million $3.5 million 

2010 55 Repealed $1 million Repealed 

2011 onward 55 n/a $1 million n/a 

As noted earlier, many studies have found that the treatment of capital gains in the 

individual income tax system affects decisions to realize capital gains. The marginal tax 

rate on capital gains depends both on the taxpayer’s income tax bracket and on the 

amount of time the investment is held before being sold. Short-term capital gains, which 

are gains on assets held for one year or less before being sold, are generally taxed at the 

taxpayer’s ordinary income tax rate. Long-term capital gains, which are gains on assets 

held for more than one year, are generally taxed at preferential rates. 

From 1988 through 1990, capital gains were taxed at the same rate as ordinary 

income. Consequently, marginal tax rates applicable to capital gains income ranged from 

15 percent to 28 percent. An additional surtax of 5 percent (intended to recapture the 

benefits from the lower 15 percent tax rate) applied to all income, including capital gains, 

over a certain income range. From 1991 through the first four months of 1997, the longterm capital gains tax rate was capped at 28 percent.8

 

Starting in May 1997, TRA97 lowered the long-term capital gains tax rates to 10 

and 20 percent. From 2001 through the first four months of 2003, the long-term capital 

gains tax rate for low-income individuals dropped to 8 percent for gains on assets held 

 

8

 Slightly higher rates could apply over certain income ranges because of the phase-out of itemized 

deductions and personal exemptions. 
8 

five years or more (as provided under TRA97). Beginning in May 2003, the capital gains 

tax rates were temporarily reduced. For high-income individuals, the rate was lowered to 

15 percent for 2003 through 2008. For low-income individuals, the rates were lowered to 

5 percent for 2003 through 2007 and to 0 percent in 2008. These provisions were later 

extended for two years (2009 and 2010). Table 2 summarizes capital gains tax rates 

facing SCF households during the time span of this study. 

Table 2: Marginal Capital Gains Tax Rates Schedule 

for SCF Households in This Study

Marginal Income Tax Rates Marginal Long-Term Capital Gains Tax Rate 

Households from SCF 1989: Tax Law 1988 

15% 15% 

28% 28% 

33% (includes 5% surtax) 33% (includes 5% surtax) 

Households from SCF 1992: Tax Law 1991 

15% 15% 

28% and 31% 28% 

Households from SCF 1995: Tax Law 1994 

15% 15% 

28%, 31%, 36% and 39.6% 28% 

Households from SCF 1998: Tax Law 1997 

15% 10% 

28%, 31%, 36% and 39.6% 20% 

Households from SCF 2001: Tax Law 2000 

15% 10% 

28%, 31%, 36% and 39.6% 20% 

Households from SCF 2004 and SCF 2007: Tax Law 2003 and 2006 

10% and 15% 5% 

25%, 28%, 33% and 35% 15% 

Note: Short-term capital gains are taxed at the same rate as ordinary income. 

4. Model and Estimation 

A household can choose to realize capital gains for a number of different reasons. 

Both the capital gains tax and the estate tax affect the costs and benefits of those 

realization decisions. 

For example, a household may sell its assets in order to finance its consumption. 

If the household is subject to the capital gains tax at rate t, selling assets allows it to 
9 

consume only (1-t) of each dollar of gains realized in addition to the original value of the 

assets, after adjusting for factors such as depreciation (the “basis”). A rise in the capital 

gains tax rate increases the cost of realizing gains. This creates an incentive for 

households to hold their assets longer, locking in capital gains realizations. 

Alternatively, a household may choose to bequeath its assets. Should the 

household decide to save its assets for bequests, the bequest recipient would receive (1-e) 

of the market value of the assets—ignoring discounting—where e is the estate tax rate. In 

contrast to the capital gains tax, a rise in the estate tax rate lowers the costs of realizing 

capital gains, increasing the likelihood that the household will sell the asset to pay for 

current consumption. 

Another perspective on the capital gains and estate taxes is that they are 

transaction costs incurred when the household adjusts its portfolio. Ignoring the estate 

tax, this transaction cost is equal to tG, where G is the amount of capital gains. An 

increase in the capital gains tax causes transaction costs to rise, reducing the probability 

that the household will sell its assets. With the estate tax, the true transaction cost is (1-

e)tG. A rise in the estate tax effectively lowers those transactions costs—increasing the 

likelihood that the household will realize its capital gains. 

For households whose head expects to live for a number of years, calculating the 

ultimate estate tax liability is complicated, because it depends on the head’s lifespan, 

growth path of assets, and estate tax law at the time of death. As discussed in the next 

section, my sample consists of households whose head’s life expectancy spanned a 

number of years. Therefore, instead of calculating the expected marginal estate tax rate, I 

follow the approach of Bernheim et al. (2004) of identifying the effects of estate taxation 

through the changes in the estate tax exemption level introduced by TRA97.9

 This change 

systematically alters the expectation across groups of households in a way that can be 

identified by households’ anticipated estate values.10 

 

9

 Auten and Joulfain (2001) used the marginal estate tax rate but their analysis is based on a sample of 

taxpayers who were within one or two years of death. 

10 As illustrated in the next section, the head of almost every household chosen in this analysis had a life 

expectancy that extends beyond the phased-in periods of the estate tax law provisions. It is therefore 

reasonable to assume that the expectation concerning estate tax of the households surveyed after 1997 are 

governed by the TRA97. 
10 

Expectations concerning the estate tax are unaffected for households anticipating 

their bequests to be smaller than $600,000 (the pre-TRA97 exemption amount). Holding 

other factors constant, the change in estate tax law should not affect their decisions to 

realize capital gains. These households constitute Group 1 in this study. 

 Households anticipating their bequests to be between $600,000 and $1 million 

(the new exemption amount after the enactment of TRA97) face a significant reduction in 

their effective estate tax rate. The resulting price effect increases the incentive to hold 

assets with accrued gains until death. The reduction in effective estate tax rate also results 

in a wealth effect whose direction depends on how taxpayers perceive bequests to heirs.

Taxpayers may view their own consumption as fulfilling basic needs and perceive 

savings for a bequest to heirs as a luxury good. If this is the case, the positive wealth 

effect should result in more savings for bequests, thus reinforcing the price effect. Certain 

taxpayers, on the other hand, may have a target level of bequests that they wish to leave 

to their heirs. With the reduction in effective estate tax rate, they can reduce their saving 

(realize higher gains for consumption) and still leave the same after-tax bequest as before. 

The finding by Auten and Joulfaian (2001)–that increases in estate tax rates unlock 

realizations—supports the view that either the price effect dominates the wealth effect or 

that the two effects move in the same direction. I therefore expect that Group 2 

households with wealth between $600,000 and $1 million will realize fewer gains after 

1997. 

 A third group includes those whose anticipated estates exceed $1 million—an 

amount that is greater than the exemption level both before and after TRA97. These 

households did not experience any change in their marginal estate tax rate but instead 

experienced a slight positive wealth effect due to the higher credit introduced by 

TRA97.11 As discussed above, the direction of the change in the capital gains realization 

decision attributable to the wealth effect is ambiguous. Given the ambiguous direction of 

the wealth effect and the relatively small impact of the 1997 legislation on estates with 

 

11 There is, however, a group of very wealthy households that experienced a slight reduction in their 

marginal estate tax rates after 1997. These were households that anticipated their estates to be between 

$17.184 million and $21.04 million. These households were no longer subject to the 5 percent surtax after 

1997. 
11 

assets in excess of $1 million, I do not expect households in Group 3 to significantly 

change their realization behavior after 1997. 

The regression analysis includes several dummy variables and interaction terms to 

account for these effects. First, dummy variables (Group2 and Group3) control for timeinvariant differences across groups. Second, a dummy variable signifies that data comes 

from a survey year after the enactment of TRA97 (PostTRA97), thus controlling for 

variation before and after TRA97. The regression framework also includes interaction 

terms between group dummies and the dummy for years after TRA97 (Group2*Post 

TRA97 and Group 3*PostTRA97). These interaction terms constitute a focus point of this 

analysis. They capture changes in behavior of Group 2 and of Group 3 relative to Group 

1 using surveys taken before 1997 as a baseline. If the realization decision of Group 2 is 

responsive to estate taxation as expected, the coefficient on the Group 2 interaction term 

should be negative and statistically significant. However, because of the ambiguous 

prediction of the wealth effect, I would not necessarily expect to see a significant change 

in the behavior of Group 3 relative to Group 1. 

 The estimating equations can be written as: 

*

1 2

3 4 1

( 2* 97)

( 3* 97)

I Group PostTRA

Group PostTRA X u

ατ α

α α

= +

+ ++

 (1) 

and 

1 2

*

3 42

( 2* 97)

ln( ) ( 3* 97) if 0

0 otherwise

Group PostTRA

Y Group PostTRA X u I

βτ β

β β

⎧ +

⎪ =+ ++ > ⎨

⎪

⎩

, (2) 

where *

I is a latent indicator of the decision to realize capital gains, Y is the amount of 

capital gains realized, τ is the marginal capital gains tax rate, Group2 and Group3 are 

group dummy variables, PostTRA97 is a dummy variable for surveys taken after the 

enactment of TRA97, and X is a vector of other control variables. The regression 

framework allows for the possibility that the effects of these explanatory variables are 

different for the extensive margin of whether to realize capital gains and the intensive 

margin of how to choose the amount of gains realized. This semi-log functional form 

suggests that the elasticity of capital gains realizations with respect to the marginal tax 

rate is an approximately linear function. 
12 

Given the progressivity of the individual income tax schedule, it is very likely that 

the capital gains tax rate variable is affected by the amounts of realized capital gains. The 

realization of capital gains increases the taxpayer’s taxable income and possibly pushes 

the taxpayer into a higher tax bracket. This endogeneity makes it necessary to find 

instruments that are highly correlated with the tax rates but are uncorrelated with the 

amount of realized gains. Consequently, I use the “first-dollar” marginal tax rate as an 

instrument for the endogenous marginal tax rate. This strategy assumes that all 

components of the tax base other than the amount of realized gains are exogenous. The 

marginal tax rate is then computed with the assumption that the taxpayer does not have 

any realized gains. It is also possible that the capital gains realization decision is related 

to charitable contributions. Consequently, in the computation of the tax instrumental 

variable, I set charitable contribution equal to the sample mean ratio of charity 

contributions to non-gain income. However, with only two capital gains tax rates during 

the study period (three for 1988), the endogeneity issue is much less important than for 

years prior to the Tax Reform Act of 1986. 

Auten and Joulfaian (2001) found that the estate tax rate is simultaneously 

determined with realized gains. Selling assets with accrued gains reduces a taxpayer’s net 

worth by the amount of capital gains tax paid and could therefore affect a person’s estate 

tax rate. For most taxpayers in my sample, however, the decline in wealth from realizing 

gains is small compared to the uncertainty about the length of their lifespans and the 

ultimate value of their estates and should have little effect, if any, on the group 

classification.12

Burman and Randolph (1994) emphasized the importance of correcting for 

sample selection. It is possible that those who realize capital gains are not randomly 

selected from the population. In such case, ignoring sample selection will lead to 

inconsistent estimates. 

This study uses the generalized Tobit estimation model developed by Lee et al. 

(1980). It consists of four steps. First, I regress the capital gains marginal tax rate ( ) τ on 

its instrument and other regressors to obtain fitted values ofτ . Next, I estimate a criterion 

 

12 Adding back estimated capital gains tax and charitable contributions (net of savings from the income tax 

deduction) to the wealth measure used in classifying households has little effect on the result. 
13 

function on the full sample using Probit maximum likelihood, with the fitted values of τ

substituting for the actual values. Third, the fitted value of τ is reestimated for the 

subsample of those realizing gains. The regression includes the estimate of the inverse 

Mills ratio from the second step as a regressor to control for possible sample selection. In 

the final step, the level equation is estimated by using ordinary least squares on the 

subsample of households that had already realized capital gains. The regressors include 

the fitted values from the preceding step and the estimate of the inverse Mills ratio. The 

standard errors are estimated using bootstrap methods because the precise asymptotic 

variance of this estimator is unknown. 

5. Data and Construction of Variables 

The data used in this study come from the Federal Reserve Board’s Survey of 

Consumer Finances. The SCF is widely regarded as the best available source on asset 

holdings and wealth accumulation for a nationally representative sample. It is drawn from 

an area probability sample of the U.S. population and a sample of high-income tax 

returns derived from an Internal Revenue Service dataset. One of the most valuable 

aspects of the SCF is the oversampling of high-income households. Oversampling highincome households helps equalize the probability of each dollar of wealth in the economy 

appearing in the sample.13 That is critical for this analysis of the effects of estate tax, 

because the distribution of wealth is highly concentrated. 

 Each SCF survey year is a random, stratified cross-section of U.S. households.14

Interviews were conducted during the second half of the survey year. Assets include 

those held by all members of the household and are valuated using market values at the 

time of the interview. Demographic characteristics are also reported as of the time of the 

 

13 For more discussion of SCF sample and weight design, see Kennickell (1998) and Kennickell and 

Woodburn (1999). 

14 The SCF’s unit of analysis is the primary economic unit (PEU). It consists of an economically dominant 

single individual or couple and all other household members who are financially interdependent with that 

individual or couple. The SCF creator gave an example of a household consisting of a married couple who 

own their home, a minor child, a dependent adult child, and a financially independent parent of one of the 

members of the couple. In such case, the PEU would be the couple and the two children. In most cases, the 

PEU and the household are identical. In a PEU headed by a couple, the head of the household is assumed to 

be the male in a mixed-sex couple or the older individual in a same-sex couple. 
14 

interview. However, the tax information, such as taxable income and capital gains 

income, corresponds to the previous calendar year. 

In order to protect respondents’ privacy, the SCF has a complex sampling scheme. 

For each survey year, the Federal Reserve Board makes available a file of 999 replicate 

weights and multiplicity factors for each weight so that users can approximate variation 

in the data using a bootstrap technique. A multiple imputation procedure is also used to 

yield five implicates for each respondent.15 

The SCF has several advantages over tax return data, although it lacks 

information on some of the wealthiest people in the United States.16 It allows 

examination of the effects of estate taxes for a larger number of years before death. This 

could be crucial if one believes that estate tax planning starts before the last few years of 

life. It also contains more extensive household demographic information. 

In classifying the households into three groups as discussed in the previous 

section, I assume that a household expects to pay the estate tax if its anticipated estate 

exceeds the relevant unified exemption level. Almost every household head from the 

survey years after 1997 (2001, 2004, and 2007) had a life expectancy that extends beyond 

2010. Therefore, it is reasonable to assume that the expectations concerning the estate tax 

schedule of the households surveyed after 1997 are governed by TRA97 rather than the 

changes resulting from EGTRRA.17 

Consequently, Group 1 consists of households that anticipated their estates to be 

below $600,000 ($1.2 million if married), Group 2 includes households that anticipated 

their estates to between $600,000 and $1 million (between $1.2 million and $2 million if 

married) and Group 3 contains households that anticipated their estates to be above $1 

 

15 The program for correcting standard errors given the SCF’s imputation scheme is adapted from the 

original Stata code written by Karen Pence with the Board of Governors of the Federal Reserve System. 

Parameter estimates are corrected by averaging the estimates obtained by analyzing each of the five 

implicates separately. Corrected standard errors are given by taking the square root of the sum of 1.2 times 

the imputation variance and the sampling variance. The imputation variance is the variance of the fiveimplicate schemes. The sampling variance is estimated using the bootstrap technique with the provided 999 

replicate weights and multiplicity factors. 

16 Some assets are likely to be held disproportionately by a few relatively wealthy families. The SCF uses a 

dual-frame sample design to provide a representation of families overall. However, by design, the SCF 

excludes families who are on the Forbes Magazine list of the 400 wealthiest people in the United States 

and whose privacy might be difficult to protect if they were included in the SCF. 

17 This assumption is relaxed in the sensitivity analysis. 
15 

million (or $2 million if married). The thresholds are twice as large for married couples 

because the analysis takes into account the unlimited spousal bequest deduction.18

In the basic specification, I assume that the households’ anticipated estate values 

equal their current net worth with an adjustment in the valuation of life insurance. For 

each household, the cash value of life insurance is replaced by its face value. As noted by 

Bernheim et al. (2004), transitions between categories should be relatively uncommon, 

because wealth tends to change rather slowly with age and the classification brackets are 

reasonably wide. This approach, however, may understate values of estates held by 

young families and may overstate values of estates of older families. To address this 

concern, in the sensitivity analysis section, I reestimate the model using an alternative 

way of predicting final estate values. 

 The dependent variable is the household’s realized capital gains, which are the net 

capital gains from mutual funds or from the sale of stocks, bonds, or real estate. The SCF, 

however, does not distinguish between short- and long-term capital gains. Consequently, 

I assume that all net capital gains are long-term. This assumption is not central to the 

analysis, because about 90 percent of capital gains are long-term for all years in the 

analysis period.19 The capital gains tax rates are calculated using the tax calculator 

(TAXSIM) provided by the National Bureau of Economic Research’s microsimulation 

model. From the SCF, I construct a file of households’ income and deduction variables 

and pass that file to TAXSIM to compute statutory federal marginal tax rates.20 The SCF 

contains information relevant to computing the household’s tax liability, including 

taxable income, capital gains realization, and marital status. TAXSIM computes marginal 

capital gains tax rate by adding a small finite difference to realized gains (in order to 

avoid encountering a discontinuity in the tax function) and calculates the effective 

marginal tax rate over this increment. Because of data limitations as well as the focus on 

the estate tax, the study does not differentiate between permanent and transitory 

responses to changes in the capital gains tax. 

 

18 The results do not change substantially if the estate tax exemption amount is allowed to double for 

widowed households as well as married households. 

19 See the IRS Statistics of Income Individual Report Table 1.4. 

20 TAXSIM assigns head of household status to respondents who have a qualified dependent. For husbands 

and wives, it also tries both joint and separate filing and selects the option that results in lower tax 

liabilities. If separate filing is chosen, non-wage income and deductions are divided equally. 
16 

 A household’s decision to realize capital gains also reflects its position in the life 

cycle and other factors. The control variables thus include demographic characteristics of 

the household head, such as age, education attainment, retirement status, marital status, 

number of children, health status, and race.21 I also include a dummy variable for the 

household’s past receipt of an inheritance. 

In addition, I include the logarithm form of wealth. Because the measure of 

wealth in the SCF is for the year after the year of the capital gains decision, estimated 

capital gains tax and charitable contributions (net of the value of the income tax 

deduction) are added back in order to reflect the household’s wealth prior to the effects of 

capital gains realizations and charitable giving decisions. The use of logarithm form helps 

eliminate skewing of the wealth distribution.22 The proportion of equity in wealth is 

included in order to take into account the transaction cost of portfolio adjustment. It could 

also proxy for household’s risk attitude. Shares of retirement assets—personally 

established IRAs and employment-based 401(k) accounts—and personal residences in 

wealth are also included in the model. Finally, I include the Standard & Poor’s inflationadjusted 500 index variable for each survey year to control for time-series variation in 

asset values. 

This empirical analysis examines the relationship between estate taxation and the 

decision to realize capital gains. In particular, the focus is on the extent to which 

households changed their decisions to realize capital gains after the estate tax change in 

1997. Consequently, I restrict the sample to households with wealth (adjusted for the 

valuation of life insurance) greater than $200,000 (in 2004 dollars) in order to make 

households more comparable across groups.23 In addition, the sample is restricted to 

households whose heads are between 50 and 80 years old. Households with heads who 

are younger than 50 are less likely to engage in any estate tax planning; those with heads 

older than 80 are more likely to die during the phased-in periods of the estate tax law 

 

21 The survey question about race was asked only of the interview respondent. This person could be the 

head or his/her spouse. The dummy variable for health status equals 1 if either the household head or 

his/her spouse (or both) had poor health. All other demographic variables reflect characteristics of the 

household head. 

22 Because capital gains on personal residences are rarely subject to tax, one of the sensitivity tests removes 

personal residences from the wealth variable; this has little effect on the results. 

23 Bernheim et al. (2004) use similar restrictions. They restrict their sample to households with children and 

net worth over $300,000 (in 2001 dollars). Heads of household must be between 50 and 80 years old. 
17 

provisions (from 1998 to 2006 for TRA97 and from 2002 to 2009 for EGTRRA).24 I also 

restrict the sample to households with at least one child, because the bequest motive is 

likely to be strongest in the case of parents.25 These restrictions are relaxed in the 

sensitivity analysis. 

Finally, I pool households from the SCF for the following years: 1989, 1992, 

1995, 2001, 2004, and 2007. This time period is particularly useful for the identification 

of the estate tax response, because the years straddle TRA97. Households from the 

survey taken in 1998 are excluded because TRA97 was enacted in August 1997. Recall 

that the capital gains realization information in the SCF corresponds to the tax year 

before the interview; hence, the 1998 SCF contains information on capital gains 

realizations in 1997. This complicates the interpretation of the responses of the 

households in the 1998 SCF. Under these restriction assumptions, the sample includes 

7,542 households (with 2,638 households realized gains).26 I relax those restrictions in 

the sensitivity analyses. 

Table 3 presents descriptive statistics of the variables used in the study. The 

fourth and fifth columns of the table present information for the restricted sample used in 

the base estimation. The second and third columns present information for the full sample 

(including 1998 SCF), which is used in one of the robustness tests. The SCF oversamples 

wealthy households; as a consequence, the means from the unweighted sample are 

substantially different from the means from the weighted sample. I use the unweighted 

sample in my regression analysis.27 

In the unweighted sample used for the base estimation, approximately half of the 

households have projected estates in excess of the TRA97 exemption level (Group 3), 

and ten percent have projected estates valued between $600,000 and $1 million (Group 

2). Slightly over 80 percent of all households in the primary sample are married couples. 

The average age of the household head is around 62 years old. More than half of all 

households are headed by a college graduate. The average value of net capital gains is 

 

24 Auten and Joulfaian (2001) find that estate taxes primarily affect the behavior of individuals of ages 50 

through 84, with the effects peaking in ages 75 through 84. 

25 See Hurd (1990). 

26 I also drop 15 observations because their capital gains income is greater than their net worth. 

27 See Dumouchel and Duncan (1983), Deaton (1997) and Winship and Radbill (1994) for discussions of 

issues related to using sample weights in regression analysis. 
18 

$231,825, while the average value of wealth excluding personal residences is around $18 

million (all dollar amounts are in 2004 dollars). About 80 percent of all households 

expect to leave a sizable bequest to their heirs. 
19 

Table 3: Descriptive Statistics of Variables Used in the Model 

All Households 

(Including 1998 SCF) 

Households with at Least One Child, 

at Least $200,000 of Wealth, and 

Head of Household Between 50 and 

80 Years Old 

Weighted 

Mean/Fraction 

Unweighted 

Mean/Fraction 

Weighted 

Mean/Fraction 

Unweighted 

Mean/Fraction 

Capital gains realizations $3,240 $96,705 $10,906 $231,825 

Marginal capital gains 

tax rate 0.133 0.155 0.158 0.187 

Fraction of Group 1 0.912 0.696 0.758 0.396 

Fraction of Group 2 0.043 0.059 0.111 0.098 

Fraction of Group 3 0.045 0.245 0.131 0.507 

Fraction of SCF 1989 0.126 0.108 0.130 0.120 

Fraction of SCF 1992 0.131 0.134 0.132 0.144 

Fraction of SCF 1995 0.137 0.148 0.134 0.167 

Fraction of SCF 1998 0.142 0.148 0.000 0.000 

Fraction of SCF 2001 0.147 0.153 0.179 0.173 

Fraction of SCF 2004 0.156 0.156 0.203 0.195 

Fraction of SCF 2007 0.161 0.153 0.221 0.201 

Retired 0.243 0.207 0.369 0.268 

Married 0.537 0.624 0.756 0.827 

Widowed 0.105 0.079 0.109 0.071 

White 0.768 0.816 0.888 0.920 

Age 49.059 50.620 62.196 61.963 

Poor health 0.079 0.062 0.067 0.043 

Previously inherited 0.212 0.257 0.351 0.382 

Number of children 2.289 0.849 3.051 3.088 

Less than high school 0.179 0.133 0.106 0.064 

High school degree 0.299 0.241 0.261 0.169 

Some college 0.229 0.200 0.214 0.162 

Bachelor’s degree 0.171 0.217 0.206 0.272 

More than bachelor’s 

degree 0.121 0.208 0.213 0.334 

Expects to leave sizable 

estate 0.524 0.629 0.633 0.785 

Equity/wealth 0.105 0.133 0.164 0.184 

Retirement assets/wealth 0.119 0.110 0.172 0.123 

Housing assets/wealth 0.975 0.701 0.575 0.339 

Wealth (in thousands) $378 $7,423 $1,148 $17,913 

Wealth with adjustment 

on life insurance (in 

thousands) $513 $8,030 $1,346 $19,140 

Notes: All dollar amounts are in 2004 dollars. 
20 

6. Results 

I first test for the strength of the instrument used in the model, because a weak 

instrument would produce a biased estimator. I follow the testing procedure proposed by 

Stock and Yogo (2003). It is based on the concern that weak instruments lead to size 

distortion of Wald tests on the parameters in finite samples. Table 4 shows selected 

results from the first-stage regression of the level equation (step 3 in the generalized 

Tobit procedure outlined at the end of Section 4). The coefficient on the instrument is 

positive and is statistically significant. The F-statistic for the exclusion restriction is 

260.11. Because the critical value for a 5 percent Wald test and a desired maximal 

distortion size of 10 percent is 16.38, I reject the null hypothesis that the instrument is 

weak. 

Table 4: First-Stage Regression Results of the Level Equation 

Dependent Variable: Actual Marginal Capital Gains Tax Rate 

Variable Coefficient Standard Error p-value 

Instrument 0.546 0.034 0.000 

Number of Households 2,638 

Adjusted R-squared 0.78 

F-statistic for instrument 260.11 

Notes: The sample is restricted to households that realize 

capital gains, have adjusted wealth above $200,000 (in 2004 

dollars), and have at least one child, and whose heads are 

between 50 and 80 years old. Estimates and bootstrapped 

standard errors are corrected for multiple imputations. Data 

are unweighted. All other exogenous regressors are included 

as control variables but are not reported. 

Table 5 presents estimates of a generalized Tobit model describing taxpayers’ 

decisions to realize capital gains. It consists of a criterion function reflecting the decision 

at the extensive margin and a level equation reflecting the decision at the intensive 

margin. 
21 

Table 5: Generalized Tobit Results 

Dependent Variable: ln(Capital Gains Realized) 

Variable Level Equation Criterion Function 

Coefficient 

Standard 

Error 

pvalue Marginal 

Effects 

Standard 

Error 

pvalue 

Marginal Capital Gains Tax 

Rate (instrumented) -0.036 0.012 0.003 -0.001 0.001 0.476 

Group 2 0.792 0.286 0.006 0.093 0.035 0.009 

Group 3 0.660 0.316 0.037 0.093 0.021 0.000 

Post TRA97 -2.096 0.589 0.000 -0.233 0.038 0.000 

Group 2 * Post TRA97 -0.568 0.271 0.036 -0.011 0.043 0.792 

Group 3 * Post TRA97 0.253 0.198 0.201 -0.007 0.023 0.772 

S&P 500 Index 0.160 0.051 0.002 0.021 0.004 0.000 

Retired 0.522 0.138 0.000 0.043 0.014 0.001 

Married -0.254 0.132 0.054 -0.003 0.017 0.844 

Widowed -0.532 0.214 0.013 0.014 0.025 0.588 

White 0.870 0.267 0.001 0.079 0.020 0.000 

Age -0.181 0.069 0.008 -0.003 0.010 0.793 

Age squared 0.149 0.054 0.005 0.004 0.008 0.605 

Poor health -0.156 0.261 0.551 -0.030 0.025 0.230 

Previously inherited 0.286 0.133 0.031 0.048 0.012 0.000 

Number of children -0.040 0.029 0.172 -0.007 0.004 0.039 

High school degree 0.238 0.321 0.459 0.031 0.030 0.298 

Some college 0.554 0.337 0.100 0.060 0.029 0.037 

Bachelor’s degree 1.072 0.407 0.008 0.115 0.030 0.000 

More than bachelor’s 

degree 1.261 0.421 0.003 0.128 0.028 0.000 

ln (Equity/Wealth) 0.103 0.032 0.001 0.014 0.001 0.000 

ln (Retirement 

Accts/Wealth) 0.006 0.007 0.411 0.002 0.001 0.003 

ln (Housing/Wealth) 0.006 0.013 0.636 0.001 0.002 0.445 

ln (Wealth) 1.406 0.151 0.000 0.077 0.005 0.000 

Inverse Mills Ratio 3.680 1.111 0.001 

Constant -11.004 4.596 0.017 

Number of households 7,542 (2,638 uncensored) 

Capital gains tax elasticity -0.763; S.E. = 0.592 

Notes: The sample is restricted to households that have adjusted wealth above $200,000 (in 

2004 dollars), and have at least one child, and whose heads are between 50 and 80 years old. 

Estimates and bootstrapped standard errors are corrected for multiple imputations. Data are 

unweighted. 

The interaction terms between the dummy variables for the three groups and the 

years after the enactment of TRA97 are the main focus points of the analysis. They 

capture the extent of the changes in the behavior of Group 2 and Group 3 relative to 

Group 1 using the years before the enactment of TRA97 as a baseline. 
22 

The coefficient for the interaction term between Group 2 and Post TRA97 

(Group2*PostTRA97) is negative and statistically significant at the 0.05 level in the level 

equation (intensive margin). It implies that, relative to Group 1, households in Group 2 

realize significantly smaller amounts of gains after TRA97. This interaction coefficient in 

the criterion function is also negative but is less precisely estimated. The coefficient for 

the interaction term between Group 3 and Post TRA97 (Group3*PostTRA97) is 

statistically insignificant in both the criterion function and the level equation. The Wald 

test strongly rejects the hypothesis that the difference between Group 2 and Group 3 is 

zero after TRA97 in the level equation (p-value = 0.0003). It does not reject that 

hypothesis in the criterion function. These findings are consistent with Auten and 

Joulfaian (2001), who found that the estate tax rate had significant effects on realizations 

in the level equation of their generalized Tobit specification. In addition, the interaction 

coefficients for Group 2 and Group 3 suggest that the observed changes in the amount of 

capital gains realized were non-monotonic in wealth. It is thus difficult to find another 

obvious explanation for this pattern other than the impact of TRA97. 

This study thus provides evidence to support the hypothesis that the increase in 

the estate tax exemption level in 1997 significantly increases the incentive to continue to 

hold assets with accrued gains among the households in Group 2. Although the sign and 

the statistical significance of the Group 2 interaction term in the level equation are as 

predicted, the fact that the coefficient of this interaction term is statistically insignificant 

(although still negative) in the criterion equation is less easily explained. One possible 

explanation is that households with some capital gains income were likely to have larger 

and more diversified portfolios. This implies greater flexibility when adjusting their 

portfolio. In addition, they were also likely to be more aware of changes in estate tax law 

and their implications.28 Variables such as education, share of equity, and net worth are 

included to pick up these effects (their coefficients are highly significant), but may not 

capture the full effect of factors such as portfolio flexibility or financial literacy. 

 

28 Financial literacy and consciousness about capital gains tax avoidance techniques may be reflected by 

education level. In one of the sensitivity tests, I group households by education level and find that the 

coefficient for the interaction dummy between college education and post-TRA97 in the criterion function 

is more precisely estimated. 
23 

The coefficient for the marginal tax rate on capital gains is negative and 

statistically significant at the 0.01 level in the level equation. It is negative but less 

precisely estimated in the criterion function. The negative sign is expected because a 

higher tax rate implies a higher cost of realizing capital gains. The effect of the capital 

gains tax rate on both the realization probability and the level of gains can be summarized 

by the elasticity of capital gains with respect to the tax rate. Following Burman and 

Randolph (1994), this elasticity ( ) ε is computed as 

1 1 [ ( )] ii i ε τ =+ + β αλ σ h , 

where τ is the capital gains marginal tax rate for household i, β1 and α1 are coefficients 

of the capital gains marginal tax rate in the level equation and criterion function, 

respectively; λ is the inverse Mills ratio function evaluated at the expected value of the 

criterion function ( i h ); and σ is the covariance between the error terms in the criterion 

function and the level equation (estimated by the coefficient on the inverse Mills ratio).29

The estimated elasticity is -0.76, which implies that a one-percent reduction in the longrun capital gains tax rate would increase expected realized net long term gains by 0.76 

percent. This elasticity is consistent with the estimate of capital gains tax elasticity at -

0.89 reported in Auten and Joulfaian (2001). It is important to note that this elasticity is 

likely to capture both permanent and transitory tax effects because of data limitations. 

The statistical significance of the inverse Mills ratio indicates that the error terms 

of the criterion function and the level equation are correlated. This suggests that the 

sample selection must be accounted for in order to avoid bias and inconsistent estimates. 

The other coefficients are generally consistent with an individual’s motives at 

different points in his or her life cycle. Capital gains realizations are positively and 

significantly related to wealth. The share of stocks in the portfolio also has a positive and 

significant effect on a household’s decision to realize capital gains. This result possibly 

reflects the fact that the sale of stocks is associated with lower transaction costs than for 

other assets such as real estate and business property. The share of wealth in retirement 

accounts is positive and statistically significant in the criterion function but not in the 

level equation, but the share of wealth in housing does not have a significant effect on 

 

29 Because the elasticity varies across households, I report the sample mean elasticity. 
24 

gains realization. The inflation-adjusted S&P 500 index—included in order to control for 

time-series variation in asset values—has significant effects in both equations. 

Controlling for all other factors, households are less likely to realize capital gains and 

they also realize smaller gains on average after TRA97. The likelihood and the amount of 

realizations for both Group 2 and Group 3 are significantly higher than for Group 1 on 

average. 

Controlling for age, households with retired heads realize larger gains than other 

households, on average. Using education to proxy for permanent income, the result 

shows that households with higher education are more likely to realize capital gains and 

that they also realize larger amount of gains than average. Households headed by married 

couples or widowers realize smaller gains relative to households headed by unmarried 

individuals or couples. 

Sensitivity Analysis

I explore the sensitivity of the study’s results to a number of alternative 

assumptions and specifications. Table 6 reports coefficients for the key interaction terms. 

Complete results are provided in Appendix A. 

 
25 

Table 6: Sensitivity Analyses 

Dependent Variable: ln(Capital Gains Realized) 

Variable Level Equation Criterion Function 

Coefficient 

Standard 

Error 

pvalue Marginal 

Effects 

Standard 

Error 

pvalue 

Panel A: Subsample of households that expect to leave a sizable bequest 

Group 2 * Post TRA97 -0.622 0.320 0.052 -0.014 0.057 0.799 

Group 3 * Post TRA97 0.272 0.245 0.267 -0.003 0.028 0.904 

Panel B: Expanding the threshold that separates Group 2 and Group 3 

Group 2 * Post TRA97 -0.453 0.229 0.048 -0.013 0.028 0.641 

Group 3 * Post TRA97 0.334 0.204 0.103 -0.005 0.023 0.829 

Panel C: Removing personal residence from the wealth variable 

Group 2 * Post TRA97 -0.601 0.268 0.025 -0.012 0.043 0.779 

Group 3 * Post TRA97 0.255 0.199 0.200 -0.008 0.023 0.733 

Panel D: Removing all sample restrictions

Group 2 * Post TRA97 -0.412 0.216 0.056 -0.017 0.014 0.218 

Group 3 * Post TRA97 -0.021 0.166 0.898 -0.027 0.007 0.000 

Panel E: Classifying households by education attainment 

College and Above 

* Post TRA97 -0.295 0.184 0.108 -0.045 0.024 0.054 

Panel F: Classifying households by imputed values of wealth 

Group 2 * Post TRA97 -0.468 0.247 0.059 -0.024 0.042 0.568 

Group 3 * Post TRA97 0.322 0.203 0.113 0.000 0.024 0.996 

Notes: Estimates and bootstrapped standard errors are corrected for multiple imputations. Data 

are unweighted. 

6.1 Subsample of Households That Expect to Leave a Sizable Bequest 

The responsiveness to the change in estate tax legislation may be stronger among 

households that expect to leave a bequest to heirs. One SCF question asks whether the 

respondent (or his or her partner) expects to leave a sizable estate to others and the 

answer choices are “yes,” “possibly.” or “no.” In this sensitivity test, I further restrict the 

sample from those used in the basic specification to those who answer “yes” or 

“possibly” to this question. This lowers the number of households to 5,926 (2,639 

uncensored). Panel A of Table 6 reports estimated coefficients for the key interaction 

terms. 

The result is consistent with the main finding. Coefficients for the key interaction 

terms follow the same pattern as those in Table 5. Wald tests reject the hypothesis that 

the difference between Group 2 and Group 3 interaction terms is zero in the level 

question but not in the criterion function (p-values = 0.0007 and 0.8436, respectively). 
26 

The coefficient for the Group 2 interaction term is slightly larger than that in the base 

specification. This finding suggests that those with bequest motives are likely to have 

stronger responses to estate taxation. 

6.2 Expanding the Threshold that Separates Group 2 and Group 3 

It is possible that households engage in estate tax minimization strategies, such as 

giving annual tax-exempt gift to heirs and setting up trusts that shelter part of their wealth 

from the estate tax. Consequently, households with current wealth slightly above $1 

million (or $2 million for married households) may expect to face the same reduction in 

estate tax as the households in the original Group 2 classification. In addition, the 

uncertainty regarding the fate of the estate tax after 2010 may have complicated the 

formation of taxpayers’ expectations. It is possible that some estate tax practitioners 

anticipated future increases in the estate tax exemption level and advised their clients to 

plan accordingly.30 

In the second sensitivity test, I modify Group 2 by increasing the threshold that 

separates Group 2 and Group 3 by $500,000 ($1 million if married). That is, Group 2 

consists of households with an adjusted value of wealth between $600,000 and $1.5 

million (between $1.2 million and $3 million if married) and Group 3 is modified to 

include households with an adjusted value of wealth above $1.5 million (or $3 million if 

married). As a result, Group 2 and Group 3 account for about 17 percent and 44 of the 

sample, respectively. The estimation results are summarized in Panel B of Table 6. 

The results are generally consistent with the main finding. In the level equation, 

the coefficient for the Group 2 interaction term is negative and statistically significant, 

and that for Group 3 is positive and somewhat significant. This may be indicative of 

Group 3 households that have a target level of bequests. The Wald test again rejects the 

null hypothesis of no difference between these two coefficients (p-value = 0.0001). In the 

criterion function, the coefficients for both interaction terms are negative and not 

statistically significant. The Wald test fails to reject the hypothesis that these two 

coefficients are not different from each other (p-value = 0.8436). 

 

30 Kiplinger (2005) suggested that the Congress would modify the estate tax after 2010 by keeping a large 

estate tax exemption rather than repealing it outright or returning it to the level prescribed by TRA97. 
27 

6.3 Removing Personal Residence from the Wealth Variable 

 A third concern involves the treatment of personal residence, because capital 

gains on personal residences are rarely subject to tax. As a sensitivity test, I replace the 

wealth variable with total assets, excluding personal residence. However, because of data 

limitations, the dependent variable still includes gains from real estate. The estimation 

results are summarized in Panel C of Table 6. 

The results follow the pattern shown in Table 5. In the level equation, the 

interaction coefficient for Group 2 is negative and statistically significant, but that for 

Group 3 is not precisely estimated. The Wald test rejects the hypothesis of no difference 

between Group 2 and Group 3 interaction coefficients (p-value is 0.0003). Both 

interaction coefficients are statistically insignificant in the criterion function. 

6.4 Removing Sample Restrictions Related to Wealth, Age, and Presence of Children 

The sample used in the base estimation excludes young households that may be 

less likely to engage in estate tax planning and low-wealth households that are less 

comparable to Group 2 and Group 3 households. Panel D of Table 5 removes these 

sample restrictions related to wealth, age, and the presence of children. This increases the 

number of households to 22,836 (4,447 uncensored). 

The results are reasonably consistent with the main finding. In the level equation, 

the coefficient for the Group 2 interaction term is negative and statistically significant 

while that for Group 3 is not statistically significant. The Wald test rejects the null 

hypothesis of no difference between these two coefficients (p-value = 0.0284). 

Coefficients in the criterion function differ somewhat from the pattern shown in Table 5. 

The coefficient for the Group 2 interaction term is negative and statistically insignificant, 

and that for Group 3 is negative and statistically significant. However, the hypothesis that 

there is no difference between these two coefficients is not rejected (p-value = 0.4760). 

6.5 Classifying Households by Education Attainment 

Panel E of Table 6 classifies households based on the attainment of advanced 

education (college and above) rather than using current values of their net worth. 
28 

Households with higher education are likely to save more and consequently likely to 

benefit from the increased estate tax exemption amount under TRA97. This method is 

less refined than the method adopted for the base estimation. Less than half of households 

in Group 1 (38 percent) have household heads with advanced education. For households 

in Group 2 and Group 3, 68 percent and 78 percent, respectively, have a head with 

advanced education. Also, in contrast to the current-wealth method, this method does not 

allow identification of the three distinct household groups. However, this could be an 

important sensitivity test to respond to concerns that estate taxation may influence the 

classification variable (current value of net worth). Classifying households by their 

educational attainment could help address this issue, because education is likely 

exogenous with respect to the estate tax. 

Although it is reasonable to assume that those with higher education are more 

likely to benefit from the 1997 estate tax change, the difference in the reduction in the 

effective estate tax rates between these two groups is not as large as the difference 

between the groups classified by wealth. Consequently, I expect to observe smaller 

relative changes under this classification method. The coefficient for the interaction 

between advanced education and Post TRA97 (College and Above*PostTRA97) is 

negative and somewhat significant in the level equation. As expected, the interaction 

coefficient is smaller (in absolute term) than that in the base specification. Moreover, it is 

negative and statistically significant in the criterion function. 

6.6 Classifying Households by Imputed Values of Wealth 

 Panel F of Table 6 follows the approach taken by Bernheim et al. (2004), using 

estimated age-wealth profiles and the 1998 life expectancy tables published by the 

Centers for Disease Control and Prevention (CDC), to predict the ultimate value of 

estates for each household. First, I place each household into wealth quintiles based on 

the real value of their net worth. Next, I estimate quantile regressions (at the 10th, 30th, 

50th, 70th, and 90th percentiles) of current wealth on a number of control factors including 

age, income, and demographic information.31 The coefficients on the age variables from 

those quantile regressions and the estimate of the date at which death will occur (derived 

 

31 Complete quantile regression results are included in Appendix B. 
29 

from the life expectancy tables) are then used to predict each household’s net worth at 

death. Approximately 93 percent of observations used in the base specification are 

classified in the same groups under the current wealth and the imputed wealth methods. 

 The results follow the pattern shown in Table 5. In the level equation, the 

coefficient for the interaction term for Group 2 is negative and statistically significant 

while that for Group 3 is positive and not statistically significant. The Wald test rejects 

the hypothesis of no difference between these two coefficients (p-value = 0.002). In the 

criterion function, the coefficients on the interaction terms for Group 2 and Group 3 are 

both statistically insignificant. The Wald test does not reject the hypothesis of no 

difference between these two coefficients (p-value = 0.5032). 

7. Conclusion 

The empirical results presented in this study support the hypothesis that the 

presence of estate taxation helps unlock capital gains realizations. In particular, after the 

enactment of TRA97, households that experienced the largest decline in their marginal 

estate tax rate realized significantly smaller gains relative to households that were 

unaffected. The results also suggest that estate taxation may enter the realization decision 

at the intensive margin rather than at the extensive margin. That is, the capital gains lockin effect that resulted from TRA97 is likely confined to households that already had 

capital gains income; it does not appear to induce responses from more households. This 

is possibly because households with some capital gains income have larger, more 

diversified portfolios and access to better tax advice. The results are reasonably robust to 

a variety of alternative specifications. 

The lock-in effect of capital gains taxation has been extensively investigated, but 

the unlocking effect of estate taxation is an empirical question that has not been fully 

explored. This is the second study that provides empirical evidence on the effect of the 

estate tax on capital gains realization. It contributes to the literature by using the SCF 

data, which contain more households with younger heads than those found in the tax 

return data used by Auten and Joulfaian (2001). Focusing on young households could be 

crucial because it is likely that estate tax planning—in particular portfolio adjustment and 
30 

realizations of capital gains—is taken well before household heads near the end of their 

lives. Rather than calculating expected marginal tax rate, the empirical strategy employed 

in this study exploits the changes in estate tax exemption level introduced by TRA97 and 

involves comparing changes in capital gains realization of households that experienced 

the decline in their marginal estate tax rates to those that were unaffected. 

Using a younger sample of households allows the examination of the effects of 

estate tax for a longer span of time before death, and thus improves the estimation of the 

responsiveness of capital gains realizations to changes in the estate tax law. However, 

other measurement problems persist. In particular, the variable measuring the expected 

value of a household’s estate is likely to be mismeasured. Compared with the very old, 

young households are subject to higher uncertainties regarding the ultimate sizes of their 

bequests. This data limitation poses a caveat for this study and suggests an avenue for 

future research. 

 
31 

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33 

APPENDIX A 

Complete Results of Sensitivity Analyses 

Table A1: Subsample of Households that Expect to Leave a Sizable Bequest 

Dependent Variable: ln(Capital Gains Realized) 

Variable Level Equation Criterion Function 

Coefficient 

Standard 

Error 

pvalue Marginal 

Effects 

Standard 

Error 

pvalue 

Marginal Capital Gains 

Tax Rate (instrumented) -0.040 0.015 0.007 -0.001 0.001 0.522

Group 2 0.833 0.309 0.007 0.101 0.042 0.016

Group 3 0.711 0.328 0.030 0.095 0.024 0.000

Post TRA97 -2.352 0.633 0.000 -0.238 0.046 0.000

Group 2 * Post TRA97 -0.622 0.320 0.052 -0.014 0.057 0.799

Group 3 * Post TRA97 0.272 0.245 0.267 -0.003 0.028 0.904

S&P 500 Index 0.175 0.051 0.001 0.021 0.004 0.000

Retired 0.657 0.157 0.000 0.052 0.016 0.001

Married -0.187 0.132 0.157 -0.004 0.020 0.826

Widowed -0.489 0.218 0.025 0.011 0.030 0.725

White 1.091 0.298 0.000 0.090 0.025 0.000

Age -0.217 0.074 0.003 -0.010 0.013 0.442

Age squared 0.179 0.059 0.002 0.010 0.010 0.320

Poor health -0.195 0.261 0.456 -0.022 0.032 0.493

Previously inherited 0.294 0.123 0.017 0.043 0.014 0.003

Number of children -0.038 0.030 0.199 -0.007 0.004 0.097

High school degree 0.233 0.327 0.477 0.012 0.037 0.739

Some college 0.720 0.372 0.053 0.068 0.035 0.050

Bachelor’s degree 1.168 0.416 0.005 0.111 0.036 0.002

More than bachelor’s 

degree 1.406 0.443 0.001 0.130 0.034 0.000

ln (Equity/Wealth) 0.134 0.037 0.000 0.016 0.001 0.000

ln (Retirement 

Accts/Wealth) 0.007 0.008 0.332 0.002 0.001 0.007

ln (Housing/Wealth) 0.017 0.014 0.232 0.002 0.002 0.363

ln (Wealth) 1.469 0.153 0.000 0.077 0.006 0.000

Inverse Mills Ratio 4.430 1.225 0.000

Constant -11.775 4.344 0.007 

Number of households 5926 (2639 uncensored) 

Notes: The sample is restricted to households that have adjusted wealth above $200,000 (in 

2004 dollars), and have at least one child, and whose heads are between 50 and 80 years old. 

Estimates and bootstrapped standard errors are corrected for multiple imputations. Data are 

unweighted. 
34 

Table A2: Expanding the Threshold that Separates Group 2 and Group 3 

Dependent Variable: ln(Capital Gains Realized) 

Variable Level Equation Criterion Function 

Coefficient 

Standard 

Error 

pvalue Marginal 

Effects 

Standard 

Error 

pvalue 

Marginal Capital Gains Tax 

Rate (instrumented) -0.036 0.012 0.003 -0.001 0.001 0.477

Group 2 0.833 0.283 0.003 0.097 0.024 0.000

Group 3 0.856 0.307 0.005 0.086 0.026 0.001

Post TRA97 -2.210 0.567 0.000 -0.233 0.038 0.000

Group 2 * Post TRA97 -0.453 0.229 0.048 -0.013 0.028 0.641

Group 3 * Post TRA97 0.334 0.204 0.103 -0.005 0.023 0.829

S&P 500 Index 0.168 0.049 0.001 0.021 0.004 0.000

Retired 0.546 0.132 0.000 0.043 0.014 0.002

Married -0.232 0.135 0.087 -0.004 0.018 0.824

Widowed -0.527 0.217 0.015 0.014 0.025 0.579

White 0.909 0.255 0.000 0.079 0.020 0.000

Age -0.188 0.069 0.006 -0.003 0.010 0.795

Age squared 0.156 0.053 0.004 0.004 0.008 0.607

Poor health -0.171 0.253 0.500 -0.030 0.025 0.231

Previously inherited 0.312 0.129 0.016 0.048 0.012 0.000

Number of children -0.045 0.028 0.112 -0.007 0.004 0.039

High school degree 0.269 0.317 0.395 0.031 0.030 0.304

Some college 0.595 0.329 0.071 0.060 0.029 0.038

Bachelor’s degree 1.132 0.393 0.004 0.115 0.030 0.000

More than bachelor’s degree 1.329 0.406 0.001 0.128 0.028 0.000

ln (Equity/Wealth) 0.110 0.030 0.000 0.014 0.001 0.000

ln (Retirement 

Accts/Wealth) 0.006 0.007 0.368 0.002 0.001 0.003

ln (Housing/Wealth) 0.006 0.013 0.615 0.001 0.002 0.451

ln (Wealth) 1.395 0.146 0.000 0.078 0.006 0.000

Inverse Mills Ratio 3.932 1.044 0.000

Constant -11.140 4.436 0.012 

Number of households 7542 (2638 uncensored) 

Notes: The sample is restricted to households that have adjusted wealth above $200,000 (in 

2004 dollars), and have at least one child, and whose heads are between 50 and 80 years old. 

Estimates and bootstrapped standard errors are corrected for multiple imputations. Data are 

unweighted. 
35 

Table A3: Removing Personal Residence from the Wealth Variable 

Dependent Variable: ln(Capital Gains Realized) 

Variable Level Equation Criterion Function 

Coefficient 

Standard 

Error 

pvalue Marginal 

Effects 

Standard 

Error 

pvalue 

Marginal Capital Gains Tax 

Rate (instrumented) -0.046 0.012 0.000 -0.001 0.001 0.335

Group 2 0.972 0.283 0.001 0.088 0.036 0.014

Group 3 0.906 0.314 0.004 0.092 0.021 0.000

Post TRA97 -2.610 0.566 0.000 -0.228 0.038 0.000

Group 2 * Post TRA97 -0.601 0.268 0.025 -0.012 0.043 0.779

Group 3 * Post TRA97 0.255 0.199 0.200 -0.008 0.023 0.733

S&P 500 Index 0.200 0.048 0.000 0.020 0.004 0.000

Retired 0.647 0.144 0.000 0.045 0.014 0.001

Married -0.290 0.135 0.032 -0.005 0.017 0.754

Widowed -0.489 0.215 0.023 0.015 0.025 0.543

White 1.081 0.271 0.000 0.079 0.020 0.000

Age -0.155 0.069 0.026 -0.002 0.010 0.871

Age squared 0.135 0.054 0.013 0.003 0.008 0.668

Poor health -0.146 0.268 0.587 -0.026 0.025 0.310

Previously inherited 0.349 0.118 0.003 0.046 0.012 0.000

Number of children -0.060 0.030 0.045 -0.008 0.004 0.034

High school degree 0.293 0.331 0.376 0.029 0.030 0.338

Some college 0.673 0.348 0.053 0.057 0.029 0.048

Bachelor’s degree 1.340 0.428 0.002 0.114 0.030 0.000

More than bachelor’s degree 1.560 0.445 0.000 0.127 0.028 0.000

ln (Equity/Wealth) 0.129 0.031 0.000 0.013 0.001 0.000

ln (Retirement Accts/Wealth) 0.005 0.007 0.485 0.002 0.001 0.011

ln (Housing/Wealth) 0.038 0.014 0.008 0.003 0.002 0.058

ln (Wealth) 1.443 0.145 0.000 0.070 0.005 0.000

Inverse Mills Ratio 4.812 1.116 0.000

Constant -13.701 4.554 0.003 

Number of households 7542 (2638 uncensored) 

Notes: The sample is restricted to households that have adjusted wealth above $200,000 (in 

2004 dollars), and have at least one child, and whose heads are between 50 and 80 years old. 

Estimates and bootstrapped standard errors are corrected for multiple imputations. Data are 

unweighted. 
36 

Table A4: Removing Restrictions on Net Worth, Age, and Presence of Children 

Dependent Variable: ln(Capital Gains Realized) 

Variable Level Equation Criterion Function 

Coefficient 

Standard 

Error 

pvalue Marginal 

Effects 

Standard 

Error 

pvalue 

Marginal Capital Gains Tax 

Rate (instrumented) -0.005 0.008 0.525 0.000 0.000 0.413

Group 2 0.628 0.222 0.005 0.046 0.016 0.004

Group 3 0.672 0.217 0.002 0.056 0.009 0.000

Post TRA97 -1.310 0.266 0.000 -0.073 0.012 0.000

Group 2 * Post TRA97 -0.412 0.216 0.056 -0.017 0.014 0.218

Group 3 * Post TRA97 -0.021 0.166 0.898 -0.027 0.007 0.000

S&P 500 Index 0.129 0.027 0.000 0.008 0.001 0.000

Retired 0.645 0.114 0.000 0.028 0.006 0.000

Married -0.228 0.083 0.006 -0.001 0.005 0.775

Widowed -0.397 0.139 0.004 0.002 0.008 0.814

White 0.598 0.158 0.000 0.027 0.005 0.000

Age -0.044 0.015 0.003 -0.002 0.001 0.046

Age squared 0.036 0.013 0.006 0.002 0.001 0.023

Poor health -0.118 0.182 0.516 -0.011 0.009 0.240

Previously inherited 0.377 0.086 0.000 0.027 0.004 0.000

Number of children -0.073 0.024 0.003 -0.006 0.001 0.000

High school degree 0.101 0.213 0.634 0.010 0.008 0.215

Some college 0.658 0.237 0.005 0.036 0.010 0.000

Bachelor’s degree 1.147 0.291 0.000 0.066 0.009 0.000

More than bachelor’s degree 1.380 0.305 0.000 0.077 0.011 0.000

ln (Equity/Wealth) 0.121 0.022 0.000 0.008 0.000 0.000

ln (Retirement Accts/Wealth) -0.001 0.004 0.886 0.000 0.000 0.112

ln (Housing/Wealth) -0.022 0.006 0.000 -0.001 0.000 0.129

ln (Wealth) 1.493 0.108 0.000 0.040 0.002 0.000

Inverse Mills Ratio 4.270 0.681 0.000

Constant -17.550 2.610 0.000 

Number of households 22836 (4487 uncensored) 

Notes: Estimates and bootstrapped standard errors are corrected for multiple imputations. Data 

are unweighted. 
37 

Table A5: Classifying Households by Educational Attainment 

Dependent Variable: ln(Capital Gains Realized) 

Variable Level Equation Criterion Function 

Coefficient 

Standard 

Error 

pvalue Marginal 

Effects 

Standard 

Error 

pvalue 

Marginal Capital 

Gains Tax -0.028 0.011 0.014 0.000 0.001 0.844

Post TRA97 -0.937 0.428 0.028 -0.194 0.039 0.000

College and Above 

* Post TRA97 -0.295 0.184 0.108 -0.045 0.024 0.054

S&P500 Index 0.094 0.041 0.022 0.020 0.004 0.000

Retired 0.396 0.128 0.002 0.041 0.014 0.003

Married -0.271 0.136 0.047 -0.013 0.018 0.476

Widowed -0.526 0.212 0.013 0.017 0.025 0.500

White 0.607 0.251 0.016 0.079 0.020 0.000

Age -0.183 0.069 0.008 -0.004 0.010 0.731

Age squared 0.144 0.054 0.008 0.005 0.008 0.559

Poor Health -0.096 0.262 0.713 -0.033 0.025 0.175

Previously Inherited 0.168 0.118 0.156 0.050 0.012 0.000

Number of children -0.021 0.028 0.454 -0.008 0.004 0.027

High school degree 0.100 0.328 0.760 0.025 0.030 0.410

Some college 0.328 0.343 0.338 0.056 0.029 0.050

Bachelor’s degree and 

above 0.969 0.456 0.033 0.141 0.028 0.000

ln (Equity/Wealth) 0.061 0.030 0.040 0.014 0.001 0.000

ln (Retirement 

Accts/Wealth) 0.001 0.007 0.916 0.002 0.001 0.001

ln (Housing/Wealth) 0.003 0.013 0.818 0.001 0.002 0.441

ln (Wealth) 1.286 0.171 0.000 0.093 0.003 0.000

Inverse Mills Ratio 2.170 1.000 0.030

Constant -6.621 4.569 0.147

Number of households 7542 (2638 uncensored) 

Notes: The sample is restricted to households that have adjusted wealth above $200,000 (in 

2004 dollars), and have at least one child, and whose heads are between 50 and 80 years old. 

Estimates and bootstrapped standard errors are corrected for multiple imputations. Data are 

unweighted. 
38 

Table A6: Classifying Households by Imputed Wealth 

Dependent Variable: ln(Capital Gains Realized) 

Variable Level Equation Criterion Function 

Coefficient 

Standard 

Error 

pvalue Marginal 

Effects 

Standard 

Error 

pvalue 

Marginal Capital Gains Tax 

Rate (instrumented) -0.035 0.012 0.003 -0.001 0.001 0.466

Group 2 0.850 0.321 0.008 0.111 0.032 0.001

Group 3 0.655 0.325 0.044 0.099 0.020 0.000

Post TRA97 -2.143 0.615 0.000 -0.236 0.040 0.000

Group 2 * Post TRA97 -0.468 0.247 0.059 -0.024 0.042 0.568

Group 3 * Post TRA97 0.322 0.203 0.113 0.000 0.024 0.996

S&P 500 Index 0.159 0.050 0.002 0.021 0.004 0.000

Retired 0.511 0.138 0.000 0.042 0.014 0.002

Married -0.247 0.131 0.058 -0.002 0.017 0.912

Widowed -0.511 0.215 0.017 0.015 0.025 0.545

White 0.868 0.272 0.001 0.080 0.020 0.000

Age -0.188 0.068 0.006 -0.004 0.010 0.717

Age squared 0.154 0.053 0.004 0.005 0.008 0.538

Poor health -0.148 0.263 0.573 -0.030 0.025 0.228

Previously inherited 0.282 0.128 0.028 0.047 0.012 0.000

Number of children -0.039 0.029 0.178 -0.007 0.004 0.036

High school degree 0.225 0.323 0.486 0.031 0.030 0.295

Some college 0.544 0.338 0.108 0.060 0.029 0.036

Bachelor’s degree 1.062 0.408 0.009 0.115 0.029 0.000

More than bachelor’s degree 1.247 0.419 0.003 0.127 0.028 0.000

ln (Equity/Wealth) 0.103 0.033 0.002 0.014 0.001 0.000

ln (Retirement Accts/Wealth) 0.005 0.007 0.460 0.002 0.001 0.004

ln (Housing/Wealth) 0.005 0.013 0.695 0.001 0.002 0.487

ln (Wealth) 1.407 0.148 0.000 0.075 0.005 0.000

Inverse Mills Ratio 3.682 1.130 0.001

Constant -10.827 4.560 0.018 

Number of households 7542 (2638 uncensored) 

Notes: The sample is restricted to households that have adjusted wealth above $200,000 (in 

2004 dollars), and have at least one child, and whose heads are between 50 and 80 years old. 

Estimates and bootstrapped standard errors are corrected for multiple imputations. Data are 

unweighted. 
39 

APPENDIX B: 

Quantile Regression Results for Estate Imputation Used in Panel F of Table 6 

Table B1: Quantile Regression Results 

Dependent Variable: ln(Net Worth) 

 Coefficients 

 10th

Percentile 

30th

Percentile 

50th

Percentile 

70th

Percentile 

90th

Percentile 

SCF Year = 1992 -0.176 -0.135 -0.141 -0.141 -0.159

SCF Year = 1995 -0.303 -0.193 -0.182 -0.182 -0.214

SCF Year = 1998 -0.322 -0.226 -0.204 -0.204 -0.171

SCF Year = 2001 -0.296 -0.177 -0.106 -0.106 -0.145

SCF Year = 2004 -0.201 -0.078 -0.050 -0.050 0.024

SCF Year = 2007 -0.244 -0.049 0.055 0.055 0.086

Age 0.061 0.068 0.065 0.065 0.048

Age (squared) -0.035 -0.040 -0.037 -0.037 -0.026

High school degree 0.047 0.078 0.062 0.062 -0.025

Some college 0.104 0.122 0.121 0.121 0.034

College 0.100 0.173 0.166 0.166 0.057

More than college 0.096 0.152 0.124 0.124 0.109

Previously Inherited 0.124 0.144 0.177 0.177 0.185

ln (Income) 0.688 -0.024 -0.562 -0.562 -1.522

ln (Income) squared -0.015 0.019 0.046 0.046 0.090

ln (Equity) 0.200 -0.083 -0.286 -0.286 -0.326

ln (Equity) squared 0.017 0.024 0.028 0.028 0.028

Retired 0.246 0.260 0.222 0.222 0.249

White 0.197 0.149 0.033 0.033 -0.007

Business owner 0.381 0.476 0.679 0.679 0.890

Poor health -0.143 -0.095 -0.138 -0.138 -0.075

Married 0.365 0.240 0.111 0.111 0.051

Widow 0.272 0.286 0.202 0.202 0.151

Female -0.022 -0.095 -0.087 -0.087 -0.094

Have 1 child 0.028 0.026 0.009 0.009 -0.001

Have 2 children 0.060 0.073 0.063 0.063 0.026

Have 3 children 0.054 0.073 0.137 0.137 0.112

Have 4 children 0.182 0.085 0.082 0.082 0.106

Have 5 or more children -0.175 -0.076 -0.122 -0.122 0.037

Born during 1900 to 1909 -0.251 0.227 -1.647 -1.647 -1.646

Born during 1910 to 1919 -0.212 0.454 -1.508 -1.508 -1.346

Born during 1920 to 1929 -0.066 0.470 -1.375 -1.375 -1.298

Born during 1930 to 1939 -0.069 0.449 -1.431 -1.431 -1.337

Born during 1940 to 1949 -0.005 0.480 -1.408 -1.408 -1.298

Born during 1950 to 1959 0.020 0.533 -1.378 -1.378 -1.341

Constant -0.894 4.755 11.908 11.908 18.562

Number of households 16,236