Senator Proposes Flat Tax on Investment Income for Foundations

Sen. Charles Schumer, Democrat of New York, has introduced a bill that would create a flat tax rate on foundation investment earnings. A similar measure was proposed in the last Congress but never got very far.

Though they are exempt from federal income tax, private foundations are required to pay 2 percent of their net investment earnings to the government, unless they increase their giving beyond the average sum they gave in the previous five years, in which case the rate is reduced to 1 percent.

In theory, the two-tier rate is meant to encourage foundations to give more. But in practice, it has the opposite effect, Mr. Schumer says.

If foundations wanted to respond generously to a tragedy like the Haiti earthquake one year, many grant makers would not want to keep increasing their giving year after year simply, to avoid the 2-percent tax.

Mr. Schumer’s measure would eliminate the two-tiered tax rate and set a flat tax of 1.39 percent, slightly higher than the bill introduced last session, when Mr. Schumer had proposed a flat tax of 1.32 percent. President Obama’s 2012 proposed budget also called for a flat excise tax of 1.35 percent.

The Council on Foundations, which has lobbied for the flat tax, said the change would encourage more giving, especially during times of crisis or economic turmoil, and would not cause any loss of tax revenue for the federal government.

During previous discussions about the flat tax, Sen. Charles E. Grassley, of Iowa, who was then senior Republican on the Senate Finance Committee, said that he was not convinced that simplifying the tax rate would lead foundations to give more.