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.
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A bad policy..causing a sick incentive indeed.
Malin
boy, sure wish my kids had to worry how much of $5 million they’d inherit because that would mean I have $5 million now.
Fortunately for my kids, we’re normal, so all they’ll have to worry about is whether I go all drooly and incontinent on them.
in short — this is a problem the rich have that normal people don’t. Their goal of becoming a permanent rich class, a veritable American royalty, will just have to wait.
Or maybe they could go out and get real jobs like the rest of us.
Pardon me while I play the world’s smallest violin for the heirs of the top 5% of the richest people in the country. Of course their needs are far more important than any other. This problem wouldn’t exist if the Bush tax cuts weren’t forced through Congress under reconciliation process. Excuse me if I don’t cry for the failure of this accounting gimmick.
Dubner providing an easy assist:
In related news, George Steinbrenner’s family saved about $600 million this week in not paying Estate Tax.
If you dare to have a job and make money, the government will take some of your money.
If you’re foolish enough to start a business, the government will take more of your money.
If you have the audacity to die rich, the government will take some of your heirs’ money.
If you decide you’d rather not get a job and provide for yourself, the government will give you money.
Interesting points – I especially like the attempt to link lowering taxes with an increase in murderous behavior of children towards their parents – those evil minded rich people!
Although the concept of an estate tax is ridiculous to begin with. How do you owe the federal government money for dying? After a lifetime of sticking its hand in your pocket the governments sticks its hand in your grave.
It would be interesting to note to all you liberal Yankees fans that had Steinbrenner died in 2009 or 2011 the family would most likely have been forced to sell their majority share in the team to pay the nearly $500 Million estate tax – lucky for the fans he died a “timely” death here in 2010!
I wonder – will Steinbrenner’s children will be accused of homicide???
The Steinbrenners win…again.
True, but there was a huge incentive to keep a wealthy person on life support in December 2009 in order to avoid the tax altogether this year, and we haven’t heard of anyone doing that. (I realize it’s tough to track this behavior.) I would think people would be far more likely to artificially prolong life than take one in order to save money, but it doesn’t appear to have happened. Just a couple of terribly wealthy families (Steinbrenner’s and Dan Duncan’s families) have had fortunate (in the literal sense) timing for their otherwise terrible losses. I take 2009-2010 results to mean to foretell that morally rational behavior will prevail over economic rationality. We’ll see.
Spork in the Road