Monday, October 19, 2009

Meanwhile, back at the ranch ...

I had almost forgotten that the bizarre witching hour for a one-year disappearance of the federal estate tax is almost at hand. Under current law, the tax will entirely disappear on January 1, 2010, and then return to life at its pre-2001 levels on January 1, 2011.

If economics researchers had political clout, they would definitely lobby for the retention of this bizarre anomaly, which could permit testing of Joel Slemrod's and Wojciech Kopczuk's noted and infamous finding (which won them the coveted Ig Nobel Prize in economics in 2001) that the timing of death is tax-responsive. (Slemrod and Kopczuk note that their data does not permit them to distinguish between the hypotheses of actual change and merely reported change in the timing of death.)

But speaking more seriously, this is a crazy and irresponsible thing to do. Imagine a very wealthy individual, without a surviving spouse, in an irreversible coma. The time is somewhere between Christmas and New Year's Eve, just over two months from now. Suppose this individual is ready to go and has even left a clear-cut living will, but that dying before the new year would cost the family $50 million of estate tax.

Luckily, I've never been faced with making decisions about a family member in these horrendous circumstances, but I have known a couple of gerontologists who get angry about excessive use of "heroic" measures, when they feel it's hopeless, disrespectful of the dying person's wishes, and being done simply because the family isn't ready to let go.

However one comes out on end-of-life care questions (and it is a true minefield), we surely don't want an estate tax thumb on the scales.

Now fast forward to the midnight hour of December 31, 2010. If Congress still hasn't done anything, living an hour longer could cost a given family $50 million of estate tax. And there are really discretionary choices people can make, well short of illegal euthanasia. E.g., provide antibiotics or not, keep the food tube going or not. Once again, this really is not a choice we want anyone to face with huge estate tax consequences in the background.

In a sane and rational political world - perhaps on the planet Zircon - Congress, if unable to address a permanent solution in the time left to it, would simply extend the 2009 estate tax rules for a year and then try to make a final decision in 2010. To be sure, continuing one-year extensions of the 2009 rules, needing to be lobbied for each time, would be a risk and itself a bad outcome. But certainly one worth taking in late 2009 if Congress is unable to address the issue seriously before the end of the year, as seems quite likely.

But will the Obama Administration try to push this? There may be political costs and benefits they need to evaluate, especially given the number of balls they already have up in the air. Would a one-year extender lead to a Senate filibuster? (My uninformed guess is yes.) Would they be able to break the filibuster? (My guess is no.) So perhaps we are going to get the mad research experiment after all.

My own take on where we ought to end up on the estate and/or inheritance tax is that there is enough empirical evidence that people under-plan for it to make it an optimal piece of the overall toolkit, even if one were to assume that the net revenue and distributional consequences of repealing it were zero due to the ability to make offsetting changes to other instruments, e.g., the income tax. But that is a separate question from whether or not to let this crazy one-year window pop open.

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