As deficits rise and concerns about tax avoidance by the rich increase, we study how unrealized gains and borrowing affect Americans’ income taxes. We have four main findings: First, measuring “economic income” as currently-taxed income plus new unrealized gains, the income tax base captures 60% of economic income of the top 1% of wealth-holders (and 71% adjusting for inflation) and the vast majority of income for lower wealth groups. Second, adjusting for unrealized gains substantially lessens the degree of progressivity in the income tax, although it remains largely progressive. Third, we quantify for the first time the amount of borrowing across the full wealth distribution. Focusing on the top 1%, while total borrowing is substantial, new borrowing each year is fairly small (1-2% of economic income) compared to their new unrealized gains, suggesting that “buy, borrow, die” is not a dominant tax avoidance strategy for the rich. Fourth, consumption is less than liquid income for rich Americans, partly because the rich have a large amount of liquid income, and partly because their savings rates are high, suggesting that the main tax avoidance strategy of the super-rich is “buy, save, die.”
We conduct the first survey experiment to understand public attitudes about the realization rule for capital gains. This rule requires that assets usually must be sold before gains on them are taxed and thus makes taxing capital income much harder. We have three main findings. First, respondents strongly prefer to wait to tax gains on stocks until sale: 75% to 25%. But the flip side is that there is surprisingly strong support for taxing gains on assets at sale or transfer, including at death, in areas where current law never taxes those gains. Second, these stated views change only modestly when randomized participants observe a policy debate composed of videos explaining both the pros and cons of taxing before sale, though the pro and con treatments have large effects individually. And, third, among many possible explanations of these attitudes, we find particular evidence for three: mental accounting; status quo effects; and a desire to tax consumption, not income.