Photo: PR handout
Because the “fiscal cliff” will not stop for death, it looks as if death’s carriage may make a “kindly” stop to pick up some American millionaires this year, to paraphrase Emily Dickinson.In 2010, after a year in which the estate tax was zeroed out altogether, Congress passed a law that set the estate tax at 35 per cent and exempted all estates under $5 million, adjusted for inflation. That law expires in January 2013 when the exemption will fall to $1 million and the tax will rise to 55 per cent.
Many families are faced with a stark proposition. If the life of an elderly wealthy family member extends into 2013, the tax bills will be substantially higher. An estate that could bequest $3 million this year will leave just $1.9 million after taxes next year. Shifting a death from January to December could produce $1.1 million in tax savings.
It may seem incredible to contemplate pulling the plug on grandma to save tax dollars. While we know that investors will sell stocks to avoid rising capital gains taxes, accelerating the death of a loved one seems at least a bit morbid—perhaps even evil. Will people really make life and death decisions based on taxes? Do we don our green eye shades when it comes to something this serious?
(Read More: Majority of Wealthy Support Taxing Themselves: Poll)
There is good evidence that there is some “elasticity” in the timing of important decisions about life and death.
It’s well-known that people can delay death, for example, in order to live through significant dates—birthdays, holidays, anniversaries. In the first week of 2000, local New York City hospitals recorded an astonishing 50.8 per cent more deaths than in the last week of 1999, according to the New York Times. Apparently, a significant number of people delayed their deaths in order to see the new millennium.
In the summer of 2004 something very strange happened in Australia. The birthrate plummeted sharply in June. Then on a single day in July more babies were born than on any other day in the prior 30 years of Australian history. July 1, 2004 was a very popular day to be born.
What caused this dip and surge in births? Seven weeks before July 1, the Australian government announced a change in the tax code that would give families a $3,000 baby-bonus starting on the first day in July. It appears that as many as 1,000 births were “moved” until after the baby bonus kicked-in, according to a 2009 study by Joshua Gans of the University of Melbourne’s Business School and Andrew Leigh of the Australian National University’s Research School of Social Sciences.
“We estimate that over 1,000 births were “moved” so as to ensure that their parents were eligible for the Baby Bonus, with about one quarter being moved by more than one week,” Gans and Leigh write.
(Read More: America’s Most Expensive Homes 2012)
According to the researchers, most of this temporal shift was due to changes in the timing of induction and cesarean section procedures. When they looked at an increase in the baby bonus that took effect two years later, on July 1, 2006, they found that the same pattern—births moving from June to July.
Now, some of this could be due to fudging the dates, so that births occurring just prior to the eligibility date were recorded as taking place afterward. But Gans and Leigh found evidence that babies really were held-in-uteri until they were eligible for the tax break. Babies born after the eligibility date, for example, had higher birth weights than those born earlier.
An earlier paper by Gans and Leigh looked into another natural experiment. In 1979, Australia abolished its federal inheritance taxes. Official records show that approximately 50 deaths were shifted from the week before the abolition to the week after.
“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,” Gans and Leigh write.
This isn’t just something peculiar to Australia. Economists Wojciech Kopczuk of Columbia University and Joel Slemrod of the University of Michigan studied how mortality rates in the United States were changed by falling or rising estate taxes. They note that while the evidence of “death elasticity” is “not overwhelming,” every $10,000 in available tax savings increases the chance of dying in the low-tax period by 1.6 per cent. This is true both when taxes are falling, so that people are surviving longer to achieve the tax savings, and when they are rising, so that people are dying earlier, according to Kopczuk and Slemrod.
“Death elasticity” does not necessarily mean that greedy relatives are pulling the plug on the dying or forcing the sickly to extend their lives into a lower taxed period. According to a 2008 paper from University of Pittsburgh Medical centre Doctor G. Stuart Mendenhall, while tax increases give potential heirs large economic incentives to limit care that would prolong life, distressed patients may “voluntarily trade prolongation of their life past the end [a low tax period] for large ﬁfinancial implications for their kin.
“Whether these incentives are explicitly speciﬁed in wills or communicated to their power of attorney over the dinner table, they are clearly present and affect the ability of all involved parties to make unbiased decisions,” Mendenhall writes.
We had something of a natural experiment in death and taxes in 2010, when the estate tax was eliminated for one year. Many predicted that this would result in many fewer deaths at the end of 2009 and a surge in deaths prior to taxes rising in 2011.
(Read More: Forget the ‘Fiscal Cliff,’ Look at These Cliffs)
My own research hasn’t uncovered any formal academic work on this period. Perhaps it is too recent. Or perhaps the setting of the exemption at $5 million made the sample size of those that could achieve significant tax savings by dying in 2010 rather than 2011 too small.
But based on past reactions to changes in taxes, it at least seems likely that some deaths that might otherwise have occurred shortly after January 1 will occur shortly before. Death may slip in ahead of the tax man for some with estates worth over $1 million.
(Correction: An earlier version of this post miscalculated the size of an estate that would be needed to achieve a $1.1 million savings through early death.)
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.