Abstract
By borrowing against their appreciated assets, individuals are able to postpone realizing capital gains and defer paying taxes to a later date, or avoiding them altogether if the assets are held until death. While the effects of capital gains taxes on investment incentives are well studied, there is very little in the way of evidence in the literature to support the proposition that taxes on realized capital gains lead to greater borrowing. This paper employs pooled samples of estate tax returns spanning 25 years to gauge how leverage varies with capital gains taxes. The data is ideally suited to measuring debt held by the well off elderly. The findings suggest that the debt ratio rises with capital gains tax rates, and add another dimension to the dynamics of household debt in the US.
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