The New Congress Should Keep the Estate Tax

When the new Congress convenes in January, permanent repeal of the estate tax is likely to be high on its agenda. But eliminating the tax would have disastrous consequences, not only for the nation’s economy and its democratic ideals, but also for its long tradition of charitable giving. We should strengthen the tax, not eliminate it.

During the 2001 debate over the estate tax, which resulted in legislation to phase out the levy over the next decade, but not end the tax permanently, there was a limited dialogue over the question of what impact repeal would have on charitable giving. We believe that it would have an adverse effect on this dynamic civic sector.

This is not because we think that people are motivated to give simply because of the tax code. Just as people give millions of volunteer hours a year without tax benefits, many people give their money away without calculating its economic value.

Although we can’t know all the diverse motivations people have for giving, the estate tax is certainly an inducement for high-net-worth families to extend their generosity.

George Soros described the role of the estate tax in his own significant giving: “I would be dishonest if I claimed that this consideration [the estate-tax deduction] had nothing to do with my decision [to donate to charity]… . Abolishing the estate tax would remove one of the main incentives for charitable giving. College presidents and directors of cultural and charitable organizations ought to be out in force lobbying against it.”

The estate tax does not force a person to be charitable. If someone is not inclined to support charity, he or she would unlikely be moved by the economic motivation that an heir will get only 50 or 60 cents of a bequest, but a charity could have a dollar.

The evidence shows, however, that the estate tax makes an already charitably oriented person deliberately give more. We know, for instance, that among families with high net worths, those with estates over $20-million, the estate tax is a significant incentive to create a charitable foundation or give to an existing institution, such as a university. Again, this is not entirely because of the estate tax. Many people give generously over their lifetimes and set up foundations long before they die. But one motivation is that, down the road, at the moment when we meet our maker, there is an estate tax.

Over the last five years, there have been some competing sentiments on this issue. Some proponents of repeal argue that the impact on charitable giving would be negligible. And one philanthropy expert argues that repealing the estate tax would actually increase charitable giving and contribute to a “new spirit of giving.”

In the last few years, Americans have given record amounts to charity. Charitable bequests, given at death, are a significant part of the picture. Unfortunately, some of the data about charitable giving and the estate tax are muddled and dated. The Internal Revenue Service hasn’t updated some data since the mid-1990s.

In 1995, a total of $8.7-billion in charitable deductions was made by estates with a total net worth of $111.6-billion. In 1997, estates provided $14.3-billion to charities. In all years, the amount from larger estates is quite substantial. In 1997, estates valued below $2.5-million gave $2.6-billion to charity, or 18 percent of the total allocation. Estates of $5-million or more gave $10.3-billion to charity, or 72 percent of what all estates gave. The largest share came from estates valued at $20-million or more, which contributed over $8.3-billion, or 58 percent.

The largest deduction chosen by estates is the unlimited amount that can be given to a surviving spouse. After the marital deduction, the largest deduction for the estate tax is for charitable contributions.

Typically more estate dollars are passed on through the spousal deduction than to charity. But for the largest taxable estates of $20-million or more, that amount given to charity in 1997 nearly equaled the amount given to the surviving spouse ($7.47-billion versus $7.53-billion).

As a rule, estates that have tax liability give two to three times as much to charity as estates without tax liability. In 1997, IRS data showed that taxable estates gave to charities 2.1 times the amount that nontaxable estates did.

Where do these bequests go? Historical IRS data about the allocation of charitable bequests give us some indication of which charities might be adversely affected by repeal. Based on data for 1995, we know that the largest number of charitable bequests, over 58 percent, go to religious institutions, accounting for 10 percent of the dollar amount of gifts. An enormous percentage of gifts from smaller estates, those under $5-million, are also largely allocated to churches, synagogues, mosques, and other religious organizations.

Over 60 percent of the dollar amount of bequests goes to scientific, medical, and educational institutions or private foundations. This leads to speculation that without the estate tax, foundations would see a significant reduction in bequests and in their capacity to give. Roughly a third of foundation assets comes from estate bequests, most from the largest estates. And coincidentally, 30 percent of the dollar value of bequests goes toward the establishment or expansion of private foundations.

David Joulfaian, who has done some of the most significant research on charitable giving and estate taxes, argues that foundations will take a big hit. “Much of the bequests of the very rich are channeled to benefit such foundations,” finds Mr. Joulfaian, who suggests that many individuals view foundation bequests as an extension of their legacy.

Over 31 percent of bequests goes to “education, medical, and science,” such as universities, hospitals, and scientific research institutes. About 3 percent goes to arts and humanities. Only 1 percent of bequests is directed to social-welfare groups promoting civil rights, community development, social-science research, or government effectiveness. But these organizations rely heavily on private foundations, so they would be adversely affected by a reduction in bequests to foundations as well.

Bequests from estates don’t just benefit the large-scale charities, such as universities and hospitals that have planned-giving programs. Because a third of bequests go to existing or new foundations, this money is regranted through numerous programs that reach very local and small-scale charities. As a result, the local Boys & Girls Club or antihunger charity benefits from the inducement of the estate tax.

Two years ago, in The Chronicle, Paul Schervish, a professor at Boston College, wrote one of the most widely quoted articles on the impact of estate taxation on charity. He argued that philanthropy would not only survive but thrive without the tax. Mr. Schervish, who once supported the estate tax, now believes that repealing the tax would “lead to greater national and personal economic growth, encourage charitable giving to be more of a voluntary act than one spurred by tax incentives, and mobilize for charity the increasing affluence and philanthropic inclinations of many Americans.”

Mr. Schervish argues that charities would be better off not lobbying for the tax, but rather should plan “how to become effective in an environment in which contributions can flow to them through a far less circuitious and expensive route than what the estate tax creates.”

Mr. Schervish’s arguments are based on data collected over the last decade showing that charitable bequests are growing and that wealthy people are already shifting their legacies to charity prior to death. Mr. Schervish also cites his extensive interviews with 112 wealthy people with assets of $5-million or more about “their expected and desired allocations of their estates to heirs, taxes, and charity.”

What Mr. Schervish found was that under current laws, these wealthy individuals expect that 16 percent of their estates will go to charity, 47 percent to heirs, and 37 percent to taxes. When asked what their desires were, they stated that they would like 26 percent to go to charity, 64 percent to go to heirs, and only 9 percent to go to taxes. Mr. Schervish draws the conclusion, based on these stated preferences, that without the lash of estate taxes, there would be a 63 percent increase in charitable bequests.

Mr. Schervish is a believer in the possibilities inherent in a “new spirit of giving.” Doing away with the estate tax would “increase not only the amount of giving, but also the quality of giving.”

“Indeed, [repeal of the estate tax] would be the basis for a new era of spiritual depth in philanthropy, making the voluntary act of charity more fully a work of liberty and humanitarian care, and less the windfall fruit of a convoluted tax strategy,” Mr. Schervish wrote. “The benefits of repeal, in the form of increased giving that is spurred by greater affluence and spirituality-inspired beneficence, rather than tax policy, are ones that all of philanthropy should embrace.”

While we are familiar with the experience and inspiration of the “new spirit of giving,” we also consider some of Mr. Schervish’s findings alarming. Even the sentiments in his limited sample, we believe, strengthen the case for the estate tax.

Although his interviews reveal a stated intention by wealthy individuals to increase their donations to charity by 63 percent, they also stated they would like to decrease their taxes by 76 percent and increase the inheritances of their heirs by 40 percent. The combined 18 percent decline in resources going to the civic and public sphere makes a pretty good case for not encouraging the superwealthy to dictate tax policy.

Indeed, the preponderance of other research studies shows that estate-tax repeal will reduce contributions to charity, both over the donor’s lifetime and at death. A study commissioned by Independent Sector and the Council on Foundations estimates that elimination of the estate tax in 1996 would have reduced charitable bequests by $3-billion in that year. Extrapolating from these 1996 estimates, there would have been a decline of $7.3-billion in 2001.

During his tenure as secretary of the U.S. Treasury, Harvard University president Lawrence Summers commissioned a study on the impact of repeal that showed that contributions to charity would decline by $5-billion to $6-billion in 1999.

The most recent research, conducted by Mr. Joulfaian, found that the deductibility of bequests has a significant effect on giving. Using a conservative set of variables, he estimates that “charitable giving may decline by some 13 percent in the absence of the estate tax.” Using other variables, he suggests it might decline by as much as 31 percent. Overall, he argues, “the higher the tax rate, the greater the giving” and the higher the estate tax, the costlier it is to make transfers to heirs.

We anticipate that the growth of wealth in the last two decades will mean that the estate tax could have an even more significant effect in the future. After all, estimates of the intergenerational transfer of wealth in the next 20 years run as high as $50-trillion. An estate tax could generate very significant revenue and be a considerable incentive to charitable giving.

William H. Gates Sr., the father of the Microsoft co-founder, is co-chair of the Bill & Melinda Gates Foundation. Chuck Collins is co-founder of United for a Fair Economy, an advocacy group in Boston, and Responsible Wealth, a national association of business leaders and investors, including William H. Gates Sr., who are concerned about economic inequality. This article is an excerpt from their book, Wealth and Our Commonwealth, copyright © 2002 by William H. Gates Sr. and Chuck Collins and is reprinted with permission of Beacon Press, http://www.beacon.org.