The following is an excerpt from an article I originally wrote in June 2008. Today, with the Bush tax cuts set to expire, the insights of this article are more important than ever.
Moving on to a different area in human predictability, Gerald Prante of the Tax Foundation recommended a white paper that examines how people adjust major life decisions—including death itself—in response to tax incentives. Kopczuk and Slemrod’s 2001 paper, “Dying to Save Taxes: Evidence from Estate Tax Returns on the Death Elasticity,” is a fascinating look at these timing decisions.
In an article I penned for the March 2007 issue of the HS Dent Forecast, “Voting for Fertility,” I commented that government pro-natal policies were not likely to work. No government has enough money to convince reluctant adults to become parents unless they were already strongly considering it. Even Russia’s generous $10,000 “baby bonuses” do little to compensate parents for the money, time, and loss of freedom that children bring. Likewise, it is not likely that many couples would permanently forgo marriage to avoid the marriage penalty on their yearly 1040 or that a significant number of healthy people would commit suicide to escape the estate tax.
That said, economics is a study of events at the margin. While major events like marriage, childbirth, and death may not be caused by tax policy, perhaps their timing can be adjusted. Kopczuk and Slemrod write:
There is also evidence that financial considerations affect the timing of decisions that are not generally thought of as being “economic.” For example, Sjoquist and Walker (1995) conclude from an analysis of Census data that the marriage penalty embedded in the U.S. income tax has a significant negative effect on the timing of marriages: as the penalty increases, fewer couples marry in the months of November and December relative to the number of marriages during the first few months of spring in the new year…
[Likewise], Dickert-Conlin and Chandra (1999) find that the timing of births is sensitive to tax incentives. Under the U.S. tax system, the tax benefits of having a child are (fully) realized only if the birth takes place before midnight, January 1. Using a sample of children from the National Longitudinal Survey of Youth, Dickert-Conlin and Chandra find that the probability that a child is born in the last week of December, rather than the first week of January, is positively correlated with tax benefits from so doing; they estimate that increasing the tax benefit by $500 raises the probability of having a child in the last week of December by 26.9 percent.
Surprisingly, a mere $500 tax break encourages a surge of births in the last week of the year. The authors later admit that they cannot say whether this phenomenon is due to natural causes, doctor-induced labor, or even ex post facto falsification of the birth records to get the tax benefit.
Kopczuk and Slemrod continue:
If birth, why not death?…There is a substantial body of evidence corroborating this phenomenon in other contexts. Phillips and King (1988) report that, among Jews, the number of deaths was lower than expected in the week before Passover and higher than expected in the week after; the pattern was most pronounced in years when the holiday fell on a weekend, when it is most likely to be celebrated by the largest number of people.
Phillips and Smith (1990) find that mortality among Chinese dips by 35.1% n the week before the Harvest Moon festival and peaks by the same amount in the week after. Anson and Anson (1997) find a similar effect related to the timing of Ramadan for Moslems living in Israel, and note that the effect was larger for women than for men, reflecting their different roles in the celebration of the holy day rites… The consensus of this literature is that death can be briefly postponed until after the occurrence of a significant occasion.
Kopczuk and Slemrod go on to say that “a non-zero death elasticity is consistent with the notion of a bequest motive.” In other words, if the timing of death is somewhat flexible, people will subtly alter the timing of their death to avoid the estate tax and thus to pass on more money to their heirs. Putting some numbers behind this, the authors found that, among those dying within two weeks before or after a change in the estate tax rate, a $10,000 potential tax savings increases the probability of dying before the tax hike by 1.6%.
Of course, whether this was altruism on the part of the dying is up for debate. The authors point out that some decisions, such as whether to remain on life support or to “pull the plug” are made not by the dying person but by their heirs. Thus, it is not clear whether the authors’ findings were indicative of altruism on the part of the dying or cold manipulation on the part of would-be beneficiaries.
At any rate, the data makes it obvious that tax policy does indeed have a predictable effect on human behavior, be it an altruistic one or a calloused one. In particular, the timing is more likely to be affected than the event itself. This is evident in marriage, birth, and even death records.
Lawmakers and policy experts should take this under consideration as we enter another election cycle. The hefty structural problems facing this country cannot be “fixed” by tinkering with the tax code, but at the margin, some improvements can be made. For example, Baby Boomers could be persuaded to delay retirement by an extra year or two, thus putting a little less pressure on the Social Security system. Echo Boomers could be persuaded to marry and to start family formation a few months earlier, thus partially alleviating the housing crisis. Again, no silver bullet will eliminate the demographic problems facing the country. But at the margin, improvements can be made, and every little bit helps.