The Estate Tax's Perverse Incentives
If you do not think it’s a good idea for someone to have to accelerate or delay his or her death due to changing tax laws, then you cannot be very pleased about the back-and-forthing on the estate-tax law in the U.S.
Here’s how we laid it out in SuperFreakonomics:
In the United States, the rate in recent years was 45 percent, with an exemption for the first $2 million. In 2009, however, the exemption jumped to $3.5 million – which meant that the heirs of a rich, dying parent had about 1.5 million reasons to console themselves if said parent died on the first day of 2009 rather than the last day of 2008. With this incentive, it’s not hard to imagine such heirs giving their parent the best medical care money could buy, at least through the end of the year. Indeed, two Australian scholars found that when their nation abolished its inheritance tax in 1979, a disproportionately high number of people died in the week after the abolition as compared with the week before.
For a time, it looked as if the U.S. estate tax would be temporarily abolished for one year, in 2010. (This was the product of a bipartisan?hissy fit in Washington, which, as of this writing, appears to have been resolved.) If the tax had been suspended, a parent worth $100 million who died in 2010 could have passed along all $100 million to his or her heirs. But, with a scheduled resumption of the tax in 2011, such heirs would have surrendered more than $40 million if their parent had the temerity to die even one day too late. Perhaps the bickering politicians decided to smooth out the tax law when they realized how many assisted suicides they might have been responsible for during the waning weeks of 2010.
Well, as it turns out, the bickering politicians haven’t smoothed things out. The estate tax was abolished for 2010 and, as this excellent Wall Street Journal article makes clear, there’s a good chance the law will return next year at an even higher rate and with a lower cap. Highlights:
If Congress doesn’t change the law soon – and many experts think it won’t – the estate tax will come roaring back in 2011. Not only will the top rate jump to 55%, but the exemption will shrink from $3.5 million per individual in 2009 to just $1 million in 2011, potentially affecting eight times as many taxpayers. The math is ugly: On a $5 million estate, the tax consequence of dying a minute after midnight on Jan. 1, 2011 rather than two minutes earlier could be more than $2 million; on a $15 million estate, the difference could be about $8 million. …
Advisers say the estate-tax dilemma is especially awkward for heirs. “At least in December 2009, people wanted to keep their relatives alive,” says Ronald Aucutt, an estate-tax attorney with McGuire Woods in the Washington area. Now he and others are worried that heirs may be tempted to pull plugs on Dec. 31. Economists might call the taking of a life to reap a tax advantage a “perverse incentive.” District attorneys might call it homicide.