Taxes are incentives – even for divorce

A recurring theme in my blogs is how taxes act as incentives, or, more accurately, disincentives. Indeed, much public policy relies on this idea. Tax something and you get less of it. That is why Minnesota taxes cigarettes, it wants to stop people smoking. On the flipside, if you subsidize something – taxation in reverse – you get more of it. That is why government shovels money at ‘green’ energy producers. Given this insight, so central to so much public policy, it is a mystery why so many policymakers think that they can hike tax rates on activities like labor and not leave the volume of labor unaffected.

But the mysteries of public policy and taxation don’t end there. The majority of the consequences of any action are unintended. So, while policymakers might raise or lower this or that tax to achieve this or that outcome, they might, in fact, end up doing something they hardly expected. The San Diego Tribune offers this recent example

Local attorneys and judges are scrambling to finalize a flood of accelerated divorces prompted by new federal tax laws that eliminate the spousal support deduction starting Jan. 1.

Beating the Dec. 31 deadline will allow people expecting to pay spousal support to annually deduct the money from their taxable income, which can mean many thousands in tax savings for high earners.

Those who will receive spousal support also have an incentive, because judges are expected to start awarding smaller spousal support payments next year as the lost tax deduction shrinks what high earners can afford.

That mutual benefit prompted a rush of divorce filings before June 30, because a divorce can’t be finalized in California until at least six months after proceedings begin.

This isn’t a big surprise. As I wrote in our report The Cost of Minnesota’s Estate Tax,

There is even evidence that some deaths are timed to avoid inheritance taxes. Looking at data from U.S. federal tax returns, economists Wojciech Kopczuk and Joel Slemrod fi nd “some evidence that there is a small death elasticity.” Examining Australia’s abolition of its federal inheritance tax of 1979, Joshua Gans and Andrew Leigh found that approximately 50 deaths were shifted from the week before the abolition to the week after. However, as with Kopczuk and Slemrod, this seems to be a result of people changing the timing of the reporting of death, rather than changing the timing of death itself.

People respond to incentives. Public policymakers can either stamp their feet and deny this, and pursue counter productive policies, or they can acknowledge its truth, however ideologically indigestible they find it, and apply this insight correctly. All too often the current approach is incoherent.

John Phelan is an economist at the Center of the American Experiment.