Repealing Estate Tax Would Be a Heavy Blow to Charity

To the Editor:

Michael Rosen’s letter (“Kill the Estate Tax and Let Philanthropic Giving Blossom,” February 20) argues that repeal of the estate tax would have little or no negative effect on charitable bequests and could actually increase giving at death. His claims are straightforward: Repeal of the estate tax would raise wealth, and people with wealth give more wealth away. But they only tell part of the story. A full rendering suggests a different conclusion.

People who accumulate wealth in order to give it away at death already face a zero tax rate on all charitable bequests. Repealing the estate tax makes charitable bequests less attractive (more expensive) relative to other uses.

Thus, although repeal might raise the overall level of wealth — though this is by no means an established research conclusion — it would certainly reduce the share of bequests going to charitable causes.

Newly emerging evidence supports these claims. Along with economists Joel Slemrod of the University of Michigan and Jon Bakija of Williams College, I have been engaged in a project that explores the determinants of charitable giving at death. Our study exploits the fact that federal and state tax rates on estates and inheritances have changed over time in different ways across states and real wealth levels. The effect of these taxes on charitable bequests is estimated using data spanning several decades, based on aggregated information from federal estate-tax returns.

Under several different specifications, we find evidence of a strong incentive effect of estate and inheritance taxes on charitable bequests. Among the widows and widowers present in our 1998 sample (second-to-die spouses account for most charitable bequests), eliminating estate and inheritance taxes would have raised the price of charitable bequests relative to other bequests by 77 percent, on average, while raising after-tax wealth by an average of only 24 percent.

Our estimates imply that if before-tax wealth were held constant after estate-tax repeal, charitable bequests by widows and widowers would fall by 50 percent or more. Several caveats, of course, apply to this result. Responses by other decedents could vary. Giving during life would likely fall, too, because the benefit to giving during life under current law includes avoidance of income and estate taxes on the contribution, whereas the benefit after estate-tax repeal would only include income-tax avoidance. Pre-tax wealth could rise under repeal of the estate tax, though the implications for giving are unclear, as noted above. The heirs might give more than they currently do if they received higher bequests. And there are always uncertainties when predicting such a big change in tax law.

Thus, the ultimate decline could be bigger or smaller than 50 percent, but it seems highly unlikely that estate-tax repeal would not result in a significant decline in charitable bequests.

William G. Gale
Co-Director, Tax Policy Center
Brookings Institution
Washington

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To the Editor:

Michael Rosen argues that permanent repeal of the estate tax makes “(dollars and) sense for the nonprofit sector.” A forthcoming analysis from the Brookings Institution provides strong evidence to the contrary: Repeal of the estate tax would have a very powerful negative effect on charitable giving and bequests.

Mr. Rosen’s idea that we should just experiment and see what happens if the estate tax is permanently repealed is dangerous, shortsighted, and irresponsible. Assuming that government has the ability to respond quickly to undo the harm through “reimposition of the estate tax or the creation of new incentives for charitable giving” is a simplistic view of tax policy. Once a tax is permanently repealed, restoring it or creating other taxes to make up the difference is always viewed as raising taxes. Politically, raising taxes is difficult to accomplish.

There are other significant consequences of permanent repeal of the estate tax that Mr. Rosen fails to discuss. The aim of the estate tax extends far wider than just providing an added incentive for charitable giving and bequests. Americans for a Fair Estate Tax, a broad-based coalition of nonprofit groups that OMB Watch chairs, came together to oppose the permanent repeal of the estate tax because, in addition to repeal’s effect on charitable giving and bequests, the estate tax is:

• A vital source of federal revenue. The estate tax is a particularly fair tax. It is a tax on the wealthiest of the wealthy that results in government revenue for essential services and programs that benefit everyone. Repeal of the estate tax will reduce federal revenue by more than $50-billion each year once it is repealed — enough to pay for full funding of Head Start or education of disabled children, put a healthy down payment on a worthwhile prescription-drug program, or provide needed resources to address homeland security or many other activities. Without the estate tax, either important government programs will be cut or we will have to contend with an exploding deficit. Most striking is that the repeal of the estate tax would come at a time when it is most needed — when the baby boomers begin to retire, putting even greater stress on Social Security and Medicare.
• A key source of state revenue. Because many states link their estate tax to the federal tax and receive a credit for federal taxes paid, repeal of the federal estate tax means the loss of $9-billion to $11-billion in state revenue each year by the end of the decade. Under the current tax law, the state estate-tax credit will cease in 2005, well before the one-year repeal of the federal estate tax in 2010. At a time when states are in their worst fiscal crisis since World War II and health-care costs are rising rapidly, this is an unnecessary loss and will cause great harm.
• Our most progressive tax and the only means to tax-appreciated wealth that is passed from generation to generation. At a time of increasing income and asset inequality in the United States, the estate tax is an important mechanism to mitigate increasing concentrations of wealth in the hands of a few. A study by James Poterba of MIT and Scott Weisbenner of the University of Illinois found that in estates worth more than $10-million, 56 percent of the value of the estate consisted of untaxed capital gains. Without an estate tax, all of that wealth appreciation would remain untaxed as long as the estate continues to be passed on through the generations. The effect of growing concentrations of wealth on such elements of a democratic society as equality of opportunity, political voice, and stability cannot be underestimated.

Gary D. Bass
Executive Director
OMB Watch
Washington

Ellen Taylor
Coordinator
Americans for a Fair Estate Tax
Policy Analyst
OMB Watch
Washington

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To the Editor:

Regarding recent opinions expressed in The Chronicle about the charitable impact of the estate tax: Fairness and equity — not philanthropic giving and charitable bequests — are the primary reasons to oppose the Bush administration’s plans to eliminate the estate tax. The proposed repeal is simply another giveaway to the very wealthiest households and further shifts the nation’s tax burden onto the vast majority of working Americans. If anyone should be getting a tax break, it ought to be everyday Americans, who will pump that money back into the struggling economy, not those who are least in need and least likely to stimulate the economy with yet more wealth that tends to accrue rather than be put to use.

That being said, there are also some very important charitable and philanthropic reasons to be wary of the president’s tax plan. There is no question that the estate tax provides an incentive for charitable bequests, and that its complete repeal would hurt charities. Clearly there are many motivations for charitable giving, including the simple desire to do good and help society. But it is delusional to think that for many wealthy people, tax considerations do not also enter into the calculation.

Tax considerations rank second, behind “making a difference,” as stated reasons in surveys on why wealthy clients make charitable bequests — and might rank first if more donors answered that question with more candor. Most estate planners and advisers recommend that their clients pay attention to the tax incentives for charitable bequests. It sounds great to say that bequests are made with totally selfless motivations, but the tax advantage of taking unlimited charitable deductions to reduce total estate-tax liability is a significant philanthropic incentive for the biggest estates.

Already, with the continuing debate over the elimination of the estate tax and the reductions in the top estate-tax rates, the proportion of estate-tax filers making charitable bequests is beginning to drop. People can debate the impact of charitable deductions on the giving of lower- and middle-income families, but for the superwealthy the emerging evidence is that tax-rate cuts have a negative impact on charitable giving.

If the Bush administration is counting on charity to fill the gaps being created by the budget cuts outlined in The Chronicle’s February 20 issue, wiping out the estate tax is unfathomably unwise. It puts at risk, by our estimation, some 50 percent of charitable bequests. That’s not $8-billion out of $160-billion of individual giving, it’s $8-billion out of a little more than $16-billion in charitable bequests (the total made by estate-tax filers in 2000). Those bequests included roughly $3-billion to educational institutions, $4.7-billion to the foundations, $1.8-billion to religious institutions, $958-million to human-service providers, and $1.7-billion to hospitals and medical research.

Keep the estate tax because it’s an essential component of a system of fair-minded, sensible tax policy, not just because it generates $16-billion in charitable bequests. Eliminating it would inevitably lead to unfair tax hikes on the majority of Americans who would have to foot the bill for Medicare, Medicaid, Social Security, education, homeland security and an increasingly likely war. But even beyond that, don’t imagine that the estate tax has no bearing on the charitable-giving behavior of the nation’s top 2 percent of wealthy families. It is an important incentive for charitable bequests, which would plummet were the estate tax to be eliminated. The bottom line is that the president’s tax plan threatens both the majority of taxpayers and America’s charities; we can only hope that a more sensible and thoughtful alternative emerges.

Rick Cohen
Executive Director
National Committee for Responsive Philanthropy
Washington