The death rate in American hospitals skyrocketed by more than 50 per cent in January 2000.
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What could account for such a big increase in deaths? A pandemic? A terrorist attack? A natural disaster? A terrible accident?
Turns out, it was none of these things. The cause was simple: people who were dying (and the families authorising treatment) wanted to see-in the new millennium before they died.
They hung on and continued to receive medical treatment so that their death certificate ended with 2000 rather than 1999.
Regardless of whether you think this is weird or wonderful, it got economists wondering: if death rates are responsive to milestones like the new millennium, are they responsive to other things, like tax policies?
This is where it gets a bit grim (if it wasn't already), because the answer appears to be: yes.
Economists Joshua Gans and Andrew Leigh looked at what happened to death rates in Australia when it abolished its inheritance tax in 1979.
The logic is simple: if your family is going to have to pay a bunch more tax if you die before the tax is abolished than if you (conveniently) die after the tax is abolished, you've got a big incentive to hang on (or, if you're the family, not pull the plug).
Gans and Leigh found that not only did the death rate change when the inheritance tax was abolished, but it changed remarkably.
They found that more than half of the people who would have been subject to the tax miraculously died in the week after the tax was abolished rather than in the week before.
The result could be explained by bad record keeping - either deliberate or accidental - except that we've seen the same thing elsewhere.
Dubbed the "tax-death elasticity" (which has to be the worst euphemism in economics), studies in the US found the same result: abolishing the inheritance tax saw a delay in the number of deaths.
Luckily, there's little evidence of it happening in the other direction: we don't see an increase in deaths before an inheritance tax is introduced (which is a relief) but there is a long history of taxes changing life-and-death decisions.
The baby bonus in Australia saw a big fall in births before it was introduced and a big increase in births after it was introduced, as births were pushed back.
Taxes in the US that increase or decrease depending on whether you're married led to a convenient change in divorce rates.
Taxes have seen cakes be renamed as biscuits, windows be bricked up, dogs be registered as cows, pizza be defined as a vegetable, and backseats removed from SUVs.
The punchline is this: having sharp changes in government policy can result in what economists call "bunching". And it's a growing problem for Australia.
Just like the bunching of deaths after the inheritance tax was abolished and the bunching of births after the baby bonus came into effect, we are seeing bunching occurring across the economy, and much of it is the result of politicians being obsessed with giving preferential treatment to some businesses or people over others.
Take small businesses as an example. Politicians love small businesses. As a result, they give them lots of tax breaks, subsidies, and more lax regulations.
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The problem is that this creates bunching: businesses deliberately remain small, hurting the economy.
This isn't just a theory. It's been documented in specific industries, in specific states, and across the whole economy.
Australia's spirits industry (think: gin) is characterised by only a few large businesses and hundreds of small businesses, which are all bunched around the $350,000 annual revenue mark. Why? It's because as soon as distillers exceed $350,000 in annual revenue, they start paying excise tax.
We see a similar thing in the wine industry (where the Wine Equalisation Tax penalises firms that get too big) and in many other industries that have special taxes and special arrangements.
At the state level, research by the e61 Institute's Dan Andrews, Jack Buckley and Rachel Lee found that state-level payroll taxes (which kick in at particular thresholds of annual turnover) also result in businesses staying small.
At the national level, the introduction of the Fair Work Act in 2009 (in which firms with fewer than 15 workers were largely exempt) saw a bunching effect where small firms either hired more casual workers or used more capital (machines, computers) instead of workers.
Research from Shane Johnson, Bob Breunig, Miguel Olivo-Villabrille and Arezou Zaresani found the same thing for personal income: people's taxable incomes would bunch around tax-bracket kink points.
In sum: policies that cause bunching are problematic. They stop firms from growing, they stop businesses from hiring, and they stop people from seeking higher incomes and better jobs.
And we keep doing it. The latest IR reforms (Same Job, Same Pay) only kick in when a business hires its 20th worker. The Productivity Commission's proposed new cashflow tax only impacts firms when they pass a revenue threshold.
If we want to grow businesses, grow incomes, grow the economy and grow jobs, here's an idea: let's stop penalising growth.
- Adam Triggs is a Partner at the economics advisory firm, Mandala, and a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
