The voices of Tax Policy Center's researchers and staff
The United Framework for tax reform outlined last week by the congressional Republican leadership and the Trump Administration included a proposal to eliminate the estate tax. It also explicitly preserved the tax deduction for charitable giving, presumably because the GOP believes that contributing to non-profits is a valuable public good. Yet, by repealing the estate tax, the proposal could sharply reduce charitable contributions.
In a September 6th speech in North Dakota to promote the tax plan, President Trump made the standard case against the estate tax, which is levied only on estates in excess of $5.49 million (or $10.98 million for married couples). In his talk, he pointed out a local rancher named Julie and said,
Like many family ranchers, Julie worries about the death tax shutting down her family business and keeping her from passing it on to her children. It’s a devastating tax. Julie: We are not going to allow the death tax or the inheritance tax or the whatever-you-want-to-call-it to crush the American Dream.
Realistically North Dakota family farmers probably should worry more about being hit by lightning than paying the estate tax. In the entire US, only about 80 small farms and businesses will pay the estate tax this year and only 44 estates of any kind in North Dakota paid any amount of estate tax in 2015.
But there are other considerations to repealing the estate tax. One is that many wealthy people use charitable giving while alive or through bequests to reduce or eliminate their estate tax liability. In the mid-1940s the bequests of Henry Ford’s sons made the Ford Foundation the largest philanthropy in the world, and in 2014 businessman Ralph Wilson Jr. left $1 billion to his charitable foundation. In 2015, charitable bequests amounted to around $20 billion dollars.
While it is not possible to know how the estate tax affected any individual bequest, nor should the generosity of these gifts be minimized, there is evidence to suggest that the existence of an estate tax does effect decisions to leave charitable bequests and increases lifetime giving.
The economics are relatively simple. Each dollar bequest to charity lowers the size of the taxable estates by a dollar, and reduces the amount of estate tax liability by as much as 40 cents. Eliminating the estate tax would make leaving money to charity more “expensive”, compared to current law. The same logic follows with lifetime giving. If a high-income household claims an itemized deduction for a charitable contribution on its income tax, the gift will lower its current tax bill and at the same time the contribution will reduce the amount of money that might eventually be subject to the estate tax.
Academic research supports the theory. In 2003, Jon Bakija and Bill Gale concluded that repealing the estate tax would reduce charitable bequests by 37 percent. In 2004, TPC’s Rob McClelland (then at the Congressional Budget Office) estimated estate tax repeal would reduce charitable bequests by 16 to 28 percent. I conservatively estimate that if the estate tax had been repealed in 2014, charitable bequests would have fallen by around $4 billion. This is equivalent to one-fifth of all giving from the largest 50 foundations in the country, which depend on donations to operate.
Some argue that repealing the estate tax would increase the wealth of heirs, thus make them more likely to give to charity, but Jon Bakija, Joel Slemrod, and my TPC colleague Bill Gale found that if heirs behaved like decedents, their gifts would not make up for the lost charitable giving resulting from repealing the estate tax.
There are many reasons why eliminating the estate tax is a poor policy choice. The biggest are: Repealing the tax is highly regressive since only estates of the very wealthiest decedents face any liability under the tax, and the tax can lessen the problem of dynastic wealth across generations. But the unintended effects on charities are also a significant concern. Charities depend on fund raising, and bequests alone made up around 8 percent of all donations they received in 2016. The estate tax is a major incentive to charitable giving and bequests, and the potential financial strain on the non-profit sector is something lawmakers should consider when debating estate tax repeal.
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