If I have $1 million in cash when I die, my heirs have to pay taxes on that, even though I paid taxes on it when I originally earned it. You cannot net out the capital gains and just pay tax on that, everything is taxed.
Seems like a perfectly good way to encourage at least a tiny amount of wealth redistribution in a society where wealth is not very well distributed at all.
PS: The really sick thing is giving stock to a charity: "By doing so, you never have to calculate gains nor list the sale as income on your tax return. Moreover, if the stock was held more than a year (long-term gain), you get to itemize the charitable deduction at fair market value on the date of gift." (http://invest-faq.com/cbc/tax-cap-gains-basis.html)
To find out why this is messed up calculate what happens when you give 100$ to charity now vs buying 100$ in stock that is worth 10x a much in 20 years. I had an aunt who was audited and ended up getting close to a million back because of this stuff.
People need to read up on this stuff. There is a ton of FUD surrounding this issue.
Second, in you only leave 1 million in stock to your child they pay zero tax on that.
PS: There are a tun of way's the tax code helps high net worth individual. If you have 1billion in capital gains you pay 15% before deductions, but if you're a contractor making 10$ an hour you pay more than that to SS and Medicare let alone the rest of the tax code.
I'd prefer just a single tax. Get rid of the unfair ones like inheritance tax which stops people getting on the housing ladder etc.