Slemrod sees US tax/death experiment

Ig Nobel Prize winner Joel Slemrod (of the University of Michigan) celebrates/rues/assesses a grand US government experiment that will test his prize-winning theory:

A few years ago I called Marc Abrahams offering to return my 2001 Ig Nobel Prize in economics (won jointly with Wojciech Kopczuk [of Columbia University). Our prize-winning research showed that when estate taxes are known in advance to be changing, some people time their deaths (or have their deaths timed for them) so as to save their heirs money. The evidence: in the U.S. history of estate taxes, when tax rates went up, there were less (than otherwise) deaths after the law change, and when tax rates went down, there were more deaths after the law change. Not many more (or less), but a statistically significant amount—and only for those rich enough that the estate tax actually would apply. My call to Marc was to inform him that our findings had recently been replicated in both Australian data and Swedish data. In 2001, the Prize criterion was for discoveries “that cannot, or should not, be reproduced,” but now our research had been reproduced (even if arguably it should not have been.) Marc told me not to worry because after 2001 the Ig criterion had been changed to achievements that “first make people laugh, and then make them think” and that our research therefore still qualified.

Now the U.S. Congress has granted us a social scientist’s fondest dream—or worst nightmare—the perfect “natural experiment.” As of January 1 of this year, the U.S. estate tax has been abolished for the year 2010, and is scheduled to be reinstated in 2011 with rates as high as 55%. If our findings (and those of our colleagues in Australia and Sweden) are right, there some would be “moved” from the end of 2009 to the beginning of 2010, as some rich folks hold on to bequeath their assets tax-free. Of course, the really morbid stuff will happen at the end of this year, when dying in December of 2010 will incur no estate tax, but dying beginning in January 1, 2011 can trigger a tax liability equal to more than half the taxable estate. It’s being called the “Throw Momma from the Train” tax provision.

The perfect, albeit somewhat morbid, natural experiment may never happen, though, as it is likely (though not certain) that the law will be changed at some point his year so as to reinstate an estate tax that will apply retroactively to the estates of those who pass away in 2010. These “behavioral” implications of the estate tax changes have been all over the news in the last few weeks, undoubtedly making some people laugh and others think.