Death and Taxes

June 10, 2010

The New York Times reports:

A Texas pipeline tycoon who died two months ago may become the first American billionaire allowed to pass his fortune to his children and grandchildren tax-free.

…Had his life ended three months earlier, Mr. Duncan's riches – Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world – would have been subject to a federal tax of at least 45 percent. If he had lived past Jan. 1, 2011, the rate would be even higher – 55 percent.

The United States enacted an estate tax in 1916, and when John D. Rockefeller, America's first billionaire, died in 1937, his estate paid 70 percent. Since then, the rates have fluctuated, but this is the first time the tax has been repealed altogether.

The estate tax (or "death tax") rate dropped to zero at the beginning of this year, but in 2011 will return to a rate of 55 percent with an exemption level of $1 million. This presents a small—relative to the tragedy—upside for those who happen to die this year, as was the case for Mr. Duncan. But it also provides some perverse incentives. (A pull of a plug might significantly increase the return of those years spent working to stay nana's favorite.) It will be interesting to see if death rates among the wealthy increase this year, from either morally suspect heirs or as a result of bribed doctors changing death dates to 2010 for those who passed in late 2009. The most subtle government intervention, including taxation, can distort people's behavior to unforseeable consequence. The instability of the death tax, with so much in money at stake, is bound to influence decisions at the margin. And marginal decisions about death are not something you want altered because of tax incentives.

Here is a paper by Joel Slemrod titled "Dying to Save Taxes: Evidence from Estate-Tax Returns on the Death Elasticity."


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