Tax Policy & “Moral Hazard”

Picture it: It’s late December, 2010. Granny is ailing; she could pass from this life within a matter of weeks. Her children, eyeballing the substantial estate she is leaving, reflect soberly on one fact — if she dies on or before December 31, there will be no federal estate tax on her $2.5 million estate, but if she dies on January 1, federal taxes will take a whopping $675,000 bite.

This presents an interesting question: If you know Granny is going to die within days, do you act in such a way as to hasten her demise before the end of the calendar year?

This may be a gruesome question, but a salient one as 2010 draws into its waning weeks. To ensure passage of his package of tax cuts in 2001, President George W. Bush consented to a 10-year graduated reduction of the estate tax. In 2010, the total tax is $0. In 2011, the pre-Bush rates are reinstated in full.

Death brings out the worst in people. Is pushing Granny’s departure date up by a few days worth $675,000? Considering that people will eagerly kill others for substantially less than that, is it unreasonable to wonder whether a few wealthy heirs-to-be may engage in some chicanery to reduce the money they must forfeit to Uncle Sam?

Consider the question more directly — is something as arcane as tax policy capable of directly affecting the ethical ratiocination of an individual taxpayer?¬† Is a steep, overnight hike in the estate tax an inducement to murder?¬†More to the point, will anyone be watching for a spike in the death rate of wealthy folks at the end of calendar year 2010?

Hard to say. The wealthy have recourse to living trusts and other estate-planning projects, such that the inheritance tax is often irrelevant.

But still. Talk about perverse incentives.

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  1. In the scenario you put forth, I would say that Granny is sufficiently aware of her family’s horrible greed, and with $2.5 million in net worth, is probably financially savvy enough to have left all her money to the local humane society. Never, ever, underestimate the spitefulness of old people.

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