Disturbing Questions About the Estate Tax and the Timing of Deaths

June 26, 2006

Under current law, the federal estate tax is set to expire in January 1, 2010, only to return one year later in 2011. This convoluted structure creates a 12-month window during which wealthy estate holders can completely avoid estate taxation if they happen to die during that period.

Because of the heavy burden estate taxes impose on large estates, it’s easy to see how this window creates perverse incentives for families with elderly or unhealthy estate holders near the end of life. The difference between a death on December 31, 2010 and one day later on January 1, 2011 could mean millions in estate tax liabilities—raising the specter of a wave of truly disturbing moral and ethical dilemmas faced by families and doctors, simply because of poorly designed federal tax policy.

In a new article in Economists’ Voice, Australian researchers Joshua Gans and Andrew Leigh give a sense of the severity of this issue by exploring a similar situation faced by Australian estate holders in the late 1970s. In July 1979, Australia abolished its estate tax. Gans and Leigh pose the question, “What happened to reported deaths just before and just after Australia’s estate tax repeal?”

Here’s their answer, from the article:

The 1970s saw a campaign to abolish estate taxes in Australia. For the better part of 30 years, those taxes had been relatively steady (with thresholds constant despite considerable inflation). Estates worth less than $100,000 were tax-exempt if passing to nonfamily members, and estates worth less than $200,000 were exempt if passing to family members. The highest rate was 27.9 percent, which applied to estates worth $1 million or more. During the last tax year in which the estate tax applied, we estimate that 9 percent of decedents paid the estate tax.

The abolitionist movement was finally successful in June 1978, with the Australian parliament passing legislation to entirely abolish estate taxes a year later. Since the Australian tax year runs from 1 July to 30 June, any person dying on or before 30 June 1979 was subject to federal estate taxes, while any person dying on or after 1 July 1979 was entirely exempt from estate taxes.

The Magnitude of the Effect Using data on the number of deaths by day, we were able to test for impacts on deaths in the last week of June 1979 and the first week of July.

Figure 1 shows our main finding. It charts the number of deaths during the final week of June and the first week of July. In the last week of June, when federal estate taxes still applied, the number of deaths dropped sharply; before rising in July, immediately after the tax was abolished.

Our econometric analysis (comparing June-July deaths in 1979 with June-July deaths in other years), suggests a significant effect on deaths with about 50 reported deaths shifted from the last week in which the estate tax applied to the first week of its abolition, with most of the effect occurring within three days of the policy change. Of course, as we use formal death records, it is possible that the effect we observe reflects misreporting of the death date, rather than changes in the actual timing of deaths.

While this number of deaths appears small in absolute terms (the population of Australia in 1979 was just 15 million), it adds up to around 5 percent of all deaths being shifted out of the eligibility range. Since only 9 percent of all decedents paid estate taxes, this indicates a very high elasticity among eligibles. Over half of those who would have paid the estate tax in its last week of operation managed to avoid doing so. (Emphasis in original.)

Read the full piece here. For our own recent overview of some other perverse economic effects caused by the federal estate tax, check out our recent Special Report on the topic.


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