Abolition of the Estate Tax Would Harm Giving

LETTERS TO THE EDITOR

To the Editor:

A major issue in recent debates over the estate tax has been the effect on charitable giving of repealing or sharply reducing the tax.

According to studies by the Congressional Budget Office, the Urban Institute-Brookings Institution Tax Policy Center, and various academic economists, the estate tax provides an important incentive for giving, and repealing the tax would have a substantial impact on charities.

Yet in a December 7 article (“Estate Tax’s Effect on Giving May Not Matter So Much, New Analysis Finds”), The Chronicle suggests that new research shows that repealing or seriously cutting the estate tax would have little or no effect on giving. The article also implies that estate-tax reductions have little impact on federal revenues.

The Chronicle bases its article on a study by the Center on Philanthropy at Indiana University. But the conclusions go far beyond any findings in the study.

The Chronicle first cites the fact that some 22 percent of taxable estates left bequests in 2004, a slightly higher share than the roughly 21 percent of taxable estates that left bequests in an average year from 1995 to 2000, before the estate-tax reductions enacted in 2001. From this, The Chronicle concludes, “fund raisers’ concern that estate-tax reductions would hurt charitable giving might have been overblown.”

In fact, the highlighted statistic should do nothing to alleviate fund raisers’ concerns. First, the calculation compares apples to oranges, since very different groups of estates were taxable before and after the 2001 estate-tax changes. In 2000, for instance, one in three taxable estates was valued at less than $1-million. And while 21 percent of all taxable estates gave to charity, that average was dragged down by these smaller estates, only 13 percent of which left bequests.

By 2004, no estates valued at less than $1-million were taxable, because the 2001 law had increased the estate-tax exemption — that is, the portion of an estate’s value that is exempt from tax. (Because of lags in the payment of estate tax, most estates paying tax in 2004 were estates of people who died in 2003, when the first $1-million of the estate was exempt from tax; in 2004, the exemption increased again, to $1.5-million.)

With only the larger estates — those more likely to give — left on the rolls, the percentage of taxable estates leaving bequests naturally edged up.

But that slight uptick tells us absolutely nothing about whether either larger or smaller taxable estates changed their giving behavior. Rather, it simply tells us what we already knew: that by 2004, smaller estates weren’t taxable.

There’s another way in which The Chronicle’s chosen statistic fails to address the right question. Charities are generally less concerned about the percentage of taxable estates leaving charitable bequests than about the total amount left to charity. The article never considers the amount that taxable estates left to charity and how that amount changed from 2000 to 2004.

After adjusting for inflation, the total value of bequests left by taxable estates was about 20 percent lower in 2004 than 2000.

It might be tempting to conclude that such a sharp drop-off proves the estate-tax cuts made from 2000 to 2004 had a big effect.

As the report accompanying the Center on Philanthropy study notes, however, such a conclusion cannot be drawn from these data since the decrease in the value of bequests is likely due in large part to economic factors, such as lower stock values.

What this highlights, however, is the most crucial flaw in The Chronicle’s argument: the assumption that comparisons from 2000 to 2004 estate-tax data provide informative evidence about the effects of deep estate-tax cuts on charitable giving and federal revenues. That assumption ignores the existence of other, non-tax factors that also influence giving.

It also ignores a more fundamental point. The Chronicle extrapolates from the changes in the estate tax that took effect from 2000 and 2004 to draw inferences about the effects of sharp reductions in the estate tax.

This extrapolation is misguided for the simple reason that no deep cuts in the estate tax took place from 2000 to 2004. The 2001 tax cut called for a gradual phaseout of the estate tax, culminating in its repeal (for one year) in 2010.

From 2000 to 2004, the only changes in the estate tax were a modest increase in the portion of an estate’s value that is exempt from taxation (from $650,000 to $1-million) and a modest decrease in the top tax rate (from 55 percent to 49 percent).

Charities generally are not worried about the types of changes that took place from 2000 to 2004.

They are worried by the estate-tax repeal, as well as by proposals that would dramatically raise the exemption level and, even more troubling, lower the tax rate levied on large estates to as little as 15 percent or 30 percent.

Such proposals are dangerous because large estates account for the lion’s share of all charitable bequests made at death. In 2000, before the estate-tax changes were implemented, estates valued at more than $1-million accounted for 99 percent of all such bequests left by taxable estates.

Estates valued at more than $10-million accounted for 75 percent, even though they made up only 4 percent of taxable estates.

Not surprisingly given these figures, the studies of the estate tax and charitable giving that were conducted by the Congressional Budget Office and the Tax Policy Center found that modest increases in the estate-tax exemption level — the types of changes that occurred from 2000 to 2004 — would not be expected to significantly reduce giving.

But these same studies find that an estate-tax repeal would be a significant threat to charities. CBO estimated that a repeal would have reduced giving by $13-billion to $25-billion in 2000, an amount that exceeded the total amount of corporate charitable donations made that year.

The Chronicle’s second piece of data is that federal estate-tax revenues have dropped by “only” a few billion dollars since 2000; it implies that this relatively small decline means estate-tax cuts don’t lose much revenue.

Once again, however, the statistic it cites compares apples to oranges, since it fails to adjust for the effects of inflation. Once that adjustment is made, the drop-off is larger.

More important, since the estate-tax changes made so far have been modest, they were expected to be relatively cheap compared with repealing the tax entirely. According to the Joint Committee on Taxation, Congress’s official “scorekeeper” on tax legislation, the estate-tax cuts in effect so far cost only about $4-billion per year, but repealing the tax permanently would cost more than $60-billion per year (in 2006 dollars).

The Chronicle’s third piece of data comes from a study by the Center on Philanthropy and the Bank of America that surveyed high-net-worth households about their charitable giving.

As part of the survey, households were asked how the amount they would leave to charity would change if the estate tax were repealed. Only a small fraction of those surveyed said they would decrease their bequests.

In general, researchers are highly skeptical of survey data such as these, especially when they conflict with data on what people have actually done in the past. The consensus view is that many people answer survey questions based on what they think they ought to have done.

With proposals for drastic estate-tax cuts still under discussion, charitable organizations should remain very concerned about the estate-tax debate and its implication for charitable giving.

Robert Greenstein
Executive Director
Aviva Aron-Dine
Federal Tax Policy Analyst
Center on Budget and Policy Priorities
Washington