When the lack of a "death tax" becomes a death incentive

From Paul Krugman's "Conscience of a Liberal" blog yesterday:

December 16, 2009, 6:36 pm

Throwing Momma from the train

I warned you, back in 2001!

So in the law as now written, heirs to great wealth face the following situation: If your ailing mother passes away on Dec. 30, 2010, you inherit her estate tax-free. But if she makes it to Jan. 1, 2011, half the estate will be taxed away. That creates some interesting incentives. Maybe they should have called it the Throw Momma From the Train Act of 2001.

And it’s happening:

At the beginning of 2010, the Bush estate tax plan is scheduled to change such that all estates, up to any value, are excluded. Because the tax bill was passed through reconciliation, however, it has a ten-year time frame, meaning that the law expires at the end of 2010. And that means that the heirs of fortunes received in 2010 will pay no tax, while heirs getting theirs in 2011 will pay 50% of the value of the estate to the Internal Revenue Service.

Perhaps you notice the uncomfortable incentive structure here.

Just for the record, the December 16 Economist blogpost Paul K is quoting from above continues:

The House of Representatives voted at the beginning of December to continue the current year policy into 2010; instead of an exclusion for all estates, only those greater than $3.5 million in value would be taxed. That would still leave some bad incentives in place, but it would be better than the current policy path. That left the Senate, graveyard of sensible policy ideas. And the Senate has now abandoned its effort to pass the House extension of the estate tax measure.

Democratic senators are saying that they'll address this early next year and will likely impose the tax retroactively. We'll see. If they do not, there may be a few nervous older people tottering around next year, checking the brake lines on their Cadillacs and generally eyeing their heirs with suspicion.

JUST THIS ONCE, IF CONGRESS DOES
NOTHING, WE REAP A "POLICY" WINDFALL

My FDL News colleague David Dayen has noted: "If the estate tax stays under current law, repealed for one year but back to the pre-Bush levels thereafter, that will recoup, according to the CBO, $235 billion dollars more over 10 years than if the House version, which restores 2009 levels for next year and makes it permanent. Nobody seems to be talking about that, amidst the one-year repeal and the hazards thereto."

He's written about this at greater length: Deficit-Conscious White House Approves Of Estate Tax Cut Costing Gov’t $230 Billion?

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