Death and Taxes

People respond to incentives, the economists say, and it’s starting to look like they’re right. According to a study released last year by Wojciech Kopczuk and Joel Slemrod, two researchers at the University of Michigan, Americans obey the injunctions of their pocketbooks even when life and death are at stake. The study, which examined changes in the estate tax over the past century, found a statistically significant correlation between the exact timing of death and the relevant tax advantages to the decedent’s estate. In other words, when a reduction in the estate tax approaches, Americans prudently put off meeting their Maker until their tax liability goes down.

(Before I am accused of being morbid, let me note that the miracle of birth also responds to financial incentives. The full tax advantages of childbirth expire at midnight on January 1 every year. And according to many years of data on U.S. births, the greater the tax benefits, the greater the difference in birth rates between late December and early January.)

For their efforts, Kopczuk and Slemrod received the 2001 “Ig Nobel” prize for economics, a parody prize given out by a science humor journal. Yet we may soon find out if the researchers deserve the real Nobel instead. The Bush administration’s repeal of the estate tax will take place in 2010, but the tax will then come back into force on Jan. 1, 2011. This bizarre sequence of events provides the perfect test case for the death-and-taxes theory. Will prospective heirs request extraordinary measures as 2009 draws to a close? And what horrors might take place in the waning hours of Dec. 31, 2010?

The ephemeral nature of the estate tax repeal was one of the most curious features of the Bush tax cut. Many other cuts also expire in 2011, and the president has recently called on Congress to make them permanent. “It’s a quirk in the law,” Bush announced on April 15, and it “doesn’t make much sense.” Americans will find it hard to plan their futures when “all of a sudden these things get kicked in full time and then go away.” (The next day, Bush told a business group that “those taxes need to be permanent”—but you get the idea.)

With all this rhetoric directed against the tax bill, you’d think that someone other than Bush’s own party had drafted it. In fact, the Republicans put in the 2011 sunset provision themselves, partly for procedural reasons but also to keep the long-term cost of the tax cut within its advertised $1.35 trillion price tag. If the tax cuts are made permanent, they’ll cost the treasury more than $200 billion every year after 2012. In today’s dollars, that’s about how much the government spends on education, the environment, agriculture and community development combined.

Where will the extra money come from, you ask? Well, we can either eliminate all of the programs above, or we can start borrowing our way into oblivion. Outside of Social Security and Medicare, the federal budget was already slipping into the red due to the economic downturn and the war on terrorism, neither of which seem to be going away anytime soon. And every dollar of debt we incur today—along with every Social Security or Medicare dollar that gets lost on the way to the trust fund—will make it that much harder to pay for these entitlements when the baby boomers retire. But Bush needn’t worry; by that time he’ll be out of office.

One has to admire the skill with which the Republicans accomplished their bait-and-switch. Bush only managed to sell Congress on the tax cut by whittling down the cost with accounting gimmicks. Few Americans knew about the hidden expiration date, and even fewer cared about it. But now that the booby-trapped tax bill has been signed into law, congressional Democrats have to accept the permanent cuts, or else be accused of raising taxes in 2011. House Speaker Dennis Hastert (R-Ill.) has accused the Democrats of supporting a “now you see it, now you don’t” tax code, and Rep. Kenny Hulshof (R-Mo.) has taken to calling the 2011 expiration the “largest tax increase” in American history. The whole scheme brings to mind the traditional example of chutzpah—the murderer who kills his parents and then asks for the court’s mercy as an orphan.

A bill to make the cuts permanent passed the House last Friday. For the moment, Senate Democrats appear to be holding firm, but it’s anyone’s guess what will happen as the 2002 elections approach. One would think that in a time of war, when we are fighting terrorism worldwide, we could muster enough spirit of shared sacrifice to hold off on permanent tax cuts—or maybe even to cancel some that haven’t kicked in yet. But the tax cuts are too precious for Bush to touch, even if he has to turn down the energy department’s plea for new security measures at our nation’s nuclear plants.

In a way, the Republicans are right: the original tax bill was absurd, and it’s a shame that conservative Democrats helped it pass. Unfortunately, politicians respond to incentives too, and the people who will pay the full cost of these hidden cuts and accounting tricks aren’t yet old enough to vote. But don’t worry—soon they’ll inherit plenty.

Stephen E. Sachs ’02 is a history concentrator in Quincy House. His column appears on alternate Tuesdays.