Tuesday, December 22, 2009

Grandma got run over by a reindeer?

Krugman puts the unusual risk now facing the well-endowed elderly in the US more bluntly:

Throwing Momma from the train

I warned you, back in 2001!

"So in the law as now written, heirs to great wealth face the following situation: If your ailing mother passes away on Dec. 30, 2010, you inherit her estate tax-free. But if she makes it to Jan. 1, 2011, half the estate will be taxed away. That creates some interesting incentives. Maybe they should have called it the Throw Momma From the Train Act of 2001.

And it’s happening:

"At the beginning of 2010, the Bush estate tax plan is scheduled to change such that all estates, up to any value, are excluded. Because the tax bill was passed through reconciliation, however, it has a ten-year time frame, meaning that the law expires at the end of 2010. And that means that the heirs of fortunes received in 2010 will pay no tax, while heirs getting theirs in 2011 will pay 50% of the value of the estate to the Internal Revenue Service.

Perhaps you notice the uncomfortable incentive structure here.

The unwelcome news is that Australian experience shows Krugman's concerns to be well founded.

Did the Death of Australian Inheritance Taxes Affect Deaths?

Joshua S. Gans, Melbourne Business School, University of Melbourne
Andrew Leigh, Australian National University


In 1979, Australia abolished federal inheritance taxes. Using daily deaths data, we show that approximately 50 deaths were shifted from the week before the abolition to the week after. This amounts to over half of those who would have been eligible to pay the tax. Although we cannot rule out the possibility that our results are driven by misreporting, our results imply that over the very short run, the death rate may be highly elastic with respect to the inheritance tax rate.

Oh my.

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