Elimination of the Estate Tax Won’t Do Charities Any Good

To the Editor:

Paul Schervish’s reflections on the nonprofit sector’s “misappraisal of the positive effects that a reduction or elimination of the estate tax would have for philanthropy” (“Philanthropy Can Thrive Without Estate Tax,” My View, January 11) are about as convincing as trickle-down economics, a theory we don’t hear much about anymore because it proved to be such complete hogwash.

I do not understand how citing ample statistics on the upsurge in charitable bequests by the wealthy and superwealthy in a system with heavy estate taxes provides any evidence at all that the trend would continue, much less with increased quality and vigor, as Mr. Schervish suggests, were those taxes to be eliminated. This is only one of several apparent non sequiturs in his article.

While I have not conducted formal research, I have worked closely with many wonderful donors for some nine years, and there is no question in my mind that tax avoidance is an important motivator for all but the rare giver. Since it virtually always costs more to give money away than to keep it (or pass it down), charitable motivation is essential, and indeed primary, but tax incentives strongly encourage people to give more and to give more often.

Clearly, the purpose of estate taxes is not to motivate charitable giving, and it would be absurd to argue that it should be. This is simply a salutary side effect. The estate tax was instituted to counterbalance the tendency for wealth in a free-market economy to congregate in the hands of a few, because an extreme imbalance in this regard is unhealthy for the economy and, more important, for our precious democracy.

The September 2000 edition of @mott.now, a publication of the Charles Stewart Mott Foundation, reports that, according to the Federal Reserve Survey of Consumer Finances, the wealth of the poorest families declined 79.6 percent between 1983 and 1995, while the wealth of the richest families increased 17.4 percent.

Further, according to Melvin Oliver and Thomas Shapiro, authors of Black Wealth/White Wealth, the top 1 percent own more assets than the bottom 80 percent. And this even with an aggressive estate-tax system in place. More debate over whether this polarization will be exacerbated by elimination of the tax, and the consequences thereof, is clearly warranted.

When only one in five of the very wealthy leave bequests to charity even with the strong incentives provided by our current estate-tax system, it is extremely unlikely that a “new era of spiritual depth in philanthropy, making the voluntary act of charity more fully a work of liberty and humanitarian care,” will be ushered in by elimination of the tax, as Mr. Schervish postulates.

There are many complex issues, pro and con, to debate about our estate-tax system in its current form. Perhaps there are more effective ways to address the alarming polarization of wealth. Unfortunately, this issue is not likely to receive the free and well-considered debate it deserves because too many of us in the nonprofit sector will fear offending the wealthy donors on whom we depend. But any attempt to suggest that philanthropy would be helped by elimination of the estate tax, either in terms of quantity or quality, must not go unchallenged.

Rose Meissner
President
Community Foundation of St. Joseph County
South Bend, Ind.

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To the Editor:

The estate tax plays a key role in society by generating funds for charities and foundations. Repealing this tax could have a devastating effect on such organizations.

Studies by the Treasury Department have concluded that the repeal of the tax could cost charities $5-billion to $6-billion a year and noted that this is “one of the unintended consequences of repealing the estate tax.”

The Treasury Department adds that abolition of the estate tax would reduce bequests by 12 percent a year among estates large enough to be subject to the tax. Furthermore, private foundations that fund a wide variety of nonprofits are especially vulnerable, since they receive almost one-third of the value of estate taxes.

A study released by the Brookings Institution and the University of Michigan found that contributions given at death increase with estate-tax liability.

For example, in 1997, 45 percent of all estate-tax filers claimed deductions, but 70 percent of those with estates over $20 million did. And while charitable contributions total only 11 percent of deductions for estates below $1-million, they make up 40 percent of deductions for estates above $20-million. For the 182 estates with assets over $20-million, the average charitable contribution was $41-million.

The role of the nonprofit sector in society is to serve as the vehicle that improves people’s lives by working on issues of social justice and equity. If ever there was an issue of social and economic justice, this is it. Those of us in the nonprofit sector must oppose a repeal of the estate tax. Repealing the estate tax would keep wealth concentrated in a smaller segment of society, widening the gap between the haves and the have-nots.

Nonprofit organizations that serve the poor and underserved see firsthand the increased demand for services as a result of poorly designed public policies that exacerbate the impact of poverty in our society. These are the organizations that are left to take up the responsibility to care for communities when government and businesses fail to take appropriate action in areas such as an adequate minimum wage to assure a basic standard of living, health insurance, child care, investment in education, and enforcement of environmental policies, to name a few.

Repealing the estate tax will result in a loss of revenue for programs that benefit the most needy, putting more pressure on nonprofit and charitable organizations that serve this population while reducing donations to these same organizations. What does this say about our society?

The underlying message of the repeal of the estate tax should be revealed for what it is: taking care of the wealthy at the expense of the poor. It is yet another step toward dismantling the role of government that provides safety nets when and where needed and stimulates economic community development and growth that impacts all in our society.

It is on a much higher level that we must argue against the elimination of the estate tax — it is on moral and compassionate grounds that we must argue our points. It is based on the acceptance of the fundamental role and obligation nonprofits have in our society to represent the voice of those who do not have the means to contribute to Congressional campaigns. It is for those we serve that we must speak out. We urge those who experience the effects of the growing disparity in our society — economically, politically, and socially — to speak out against the elimination of the estate tax.

Sheri A. Brady
Project Director for Public Policy
National Council of Nonprofit Associations
Washington

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To the Editor:

Paul Schervish’s article on the estate tax and its impact on charitable giving obscures more than it clarifies.

In 1999, the latest year for which data are available, charitable bequests amounted to $15-billion, or about 8 percent of total charitable giving, including individual, bequest, corporate, and foundation giving.

Charitable bequests make up only about 2 percent of total nonprofit revenue. While the trend in giving through bequests is clearly upward (bequests have doubled in inflation-adjusted dollars since 1967), they still account for a small amount of total revenue and total giving. Thus, to say that eliminating or even reducing this source of funding would have a “disastrous” or “devastating” impact on charities is to set up a straw man that is very easily knocked down.

There are three other elements that fuel the debate about the estate tax: anecdotal evidence, economic analysis, and political philosophy. Mr. Schervish draws on all three.

While advocates pro or con of estate-tax repeal can cite evidence that supports their position, all of us should recognize that this is an inherently difficult subject about which to generate conclusive research findings.

Mr. Schervish correctly notes that Americans are committing a growing amount of their estates to charitable bequests rather than to heirs. Several factors undoubtedly influence this trend, including the growing number of large estates over $20-million. But, if anything, a positive trend toward charitable giving based on the current tax structure would argue for the status quo, not for reducing incentives to give to charity.

Mr. Schervish’s argument gets even more tenuous when he wades into the deep and murky waters of the macroeconomic effects of estate-tax repeal on economic growth. To suggest that estate-tax repeal might help to double the rate of economic growth or that it would have any major impact on economic growth is highly speculative. The most that can be said is that economists disagree about whether estate-tax repeal would have a significant effect on savings, labor, or economic growth.

So, what can we say about the impact of the estate tax on charitable giving?

We can say that the research is not conclusive.

Researchers have identified two major factors affecting the relationships between the estate tax and charitable giving.

Repeal of the estate tax would increase the amount of wealth in private hands, and that is likely to translate into increased giving. This is the so-called wealth effect.

On the other hand, estate-tax repeal would eliminate the tax incentive for making charitable bequests that would likely decrease giving. The difficulty then becomes assessing the net effect of these two countervailing wealth and incentive effects.

The equation is further complicated by the impact of estate-tax repeal on lifetime giving and by demographic changes of a growing elderly population. Some researchers who have tried to quantify these effects have concluded that charitable bequests could decline by between one-tenth and one-third if the estate tax is fully repealed.

At 1999 levels, this would decrease giving by between $1.5-billion and $4.6-billion. Out of a total revenue base in 1997 of $665-billion, this would hardly “impoverish charities,” as Mr. Schervish’s hyperbole put it. So, devastating? No. Significant? Yes.

As for political philosophy, Mr. Schervish suggests that a tax incentive affects the “quality of giving,” and that, absent tax incentives, giving would have greater “spiritual depth.”

Research by Independent Sector over the past 20 years has quite conclusively demonstrated that tax incentives do not fundamentally affect people’s decision to give. Tax incentives do influence how much they give, when they give, and how they give.

To suggest that giving that is in some measure influenced by tax incentives is sullied or less “fully a work of liberty and humanitarian care” is a disservice to the millions of Americans who make sacrifices and express their values and their commitments through their charitable giving.

At a time when the need for increased charitable giving is as great as ever, Congress and the new administration should ensure that strong incentives for charitable bequests continue.

Peter Shiras
Senior Vice President for Programs
Independent Sector
Washington

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To the Editor:

Want some good advice? When someone swings an ax toward your head, lean into it so as to blunt the blow. Okay, so that’s crazy. But that seems to be the message that Mr. Schervish recommends in his support of repealing the estate tax.

Despite the tsunami of numbers he threw out to justify leaning into the ax, it makes no sense. The repeal of the estate tax will have a significant, lasting adverse impact on charities and core democratic principles. Here are three key reasons why the repeal of the estate tax must be opposed.

First, repeal will mean increased concentrations of wealth and power. In 1891, Andrew Carnegie argued that the wealthy could produce “an ideal state in which the surplus wealth of the few will become, in the best sense, the property of many.” Congress responded in 1916 by creating the estate tax to “break up the swollen fortunes of the rich.” It has prevailed in court challenges and remains a key principle in our progressive tax policy.

Conservatives — and even some progressives — argue that it is not the best vehicle for redistributing wealth. True, a wealth tax, for example, would be more efficient. Of course that would be opposed by conservatives and would never pass Congress. So let’s not cut off our nose to spite our face.

Conservatives have been very clever in calling the tax a “death tax.” It gives the impression that when you die you have to pay a tax — which is simply not true. Fewer than 2 percent of taxpayers pay the tax, and two-thirds of the tax that is collected is paid by the richest 0.2 percent of taxpayers. Thus, the tax is aimed at the super rich in the country and does have significant redistributive impact. After all, if it didn’t, then the wealthy would not be pushing to get it repealed.

Second, it will have an adverse impact on charitable giving, despite what Mr. Schervish says.

According to Internal Revenue Service data, depending on the year, those submitting estate-tax forms but not paying any tax are two to three times less likely to give charitable contributions as those paying taxes. Moreover, charitable contributions from those who submit forms but do not pay taxes tend to be most concentrated in smaller estates. Most likely that is because the charitable bequest likely helped to make sure that they were not taxed.

In other words, the estate tax is a huge incentive for giving.

Roughly one-third of revenue for private foundations comes from the estate tax. Higher education and scientific institutions would lose roughly the same amount of money. And other mainstream charities would lose money. In fact, the impact is likely to be even larger as transfers of intergenerational wealth increase, as has been predicted.

Charities cannot afford to wait and see whether a “new era of spiritual depth in philanthropy” would arise with repeal of the estate tax, as Mr. Schervish suggests. Too much is at stake.

Third, it will mean less resources for federal and state spending, likely providing yet another whack to charities providing public services.

A Senate bill introduced last month estimated that a 10-year phaseout of the estate tax will cost $236-billion. That amount will get much larger after the 10th year when fully phased out.

Combined with other proposed tax cuts and debt reduction, all of the surplus will be gobbled up, meaning that the government will need to make budget cuts. Moreover, states will lose $9-billion annually when the estate tax is fully phased out, compounding the problem. When there are budget cuts, it usually means to services to low-income and other vulnerable populations without political clout.

So don’t be fooled by all the hype around the repeal of the estate tax. It is bad for charities.

If there are problems with the tax, such as too many family farms being taxed, then mend it, don’t end it. Charities that believe in social justice or that rely on charitable bequests should be speaking out on this matter.

Gary D. Bass
Executive Director
OMB Watch
Washington