Estate-Tax Policy Affects Far More Than Philanthropy

To the Editor:

In “A Compromise on the Estate Tax” (My View, November 11), Diana Aviv and Robert Greenstein present only one side of the estate-tax story.

The authors claim that thanks to a recent Congressional Budget Office report, “the facts involved in the debate have largely been settled.” That is, we now know how much the estate tax encourages charitable giving — a lot. Moreover, in their advocacy of the estate tax they do not concede any argument against it. Both the CBO evidence and the case for the tax are less powerful than they claim.

With regard to the “facts”: The CBO report Ms. Aviv and Mr. Greenstein cite is based on a staff study that in turn is based on statistical inference. Unlike Ms. Aviv and Mr. Greenstein who talk about facts being settled, the authors of the CBO staff study warn: “Our results should be interpreted cautiously.”

Economic estimates based on statistical inference are notoriously slippery and highly dependent on the particular research methodology used; they are estimates, not facts. The actual impact of the estate tax could be larger or smaller than CBO’s estimates. CBO itself acknowledges that if one particular assumption of its analysis had been changed, the estimate of the increase in charitable contributions due to the estate tax would have been cut by more than half, perhaps much more.

Further, Ms. Aviv and Mr. Greenstein don’t look far enough beyond the impact of the tax on charitable giving. A finding that the tax increases donations may be enough to justify the tax for some among us with a strong passion for charitable giving. But it shouldn’t be enough for policy makers whose perspective must be broader than any single issue.

If the estate tax does inspire more giving, where do donors get the money to increase their contributions? I think there’s a good chance donors finance increased donations by reducing saving. The estate tax may inspire donors to give more charity while alive and leave less when they die. That’s not an irrational response if the government may take a big chunk out of a bequest.

From a broad public-policy perspective, any cut in saving represents an important downside, especially in view of America’s current historically low national saving rate. At a minimum, we ought to consider whether and how much the tax discourages saving. CBO’s study says nothing about that important question. However, some earlier studies do find that the estate tax cuts private saving.

On a related issue, Douglas Holtz-Eakin, currently head of the CBO, along with other researchers, concluded in a 1994 study that large inheritances encourage heirs to start new businesses and help them expand existing ones. The estate tax, which may reduce inheritances, presumably works against that pro-growth tendency.

Ms. Aviv and Mr. Greenstein are correct that large budget deficits present a growing risk to the American economy. That’s exactly why taxes that potentially discourage private saving should be re-evaluated in favor of revenue sources that either encourage such saving or are at least neutral. A fair debate must ask whether the benefits of encouraging charitable giving through an estate tax are worth the costs.

Ira Kaminow
President
Tzedakah Inc.
Bethesda, Md.