Billionaires Make Case for Estate Tax with Charity Pledge
The deaths this year of billionaires George Steinbrenner, Dan Duncan and other members of the gilded class have drawn attention to the temporary lapse of the estate tax. After all, even as Republican obstructionism produced a multi-billion dollar windfall for the heirs of some of America's iconic rich, the one-year expiration of the estate tax could cost the U.S. Treasury more than $25 billion this year alone.
As it turns out, that is just one powerful argument for restoring the estate tax at a time of budget deficits and record income inequality. Another, as today's pledge by 40 billionaires to give away half of their money highlights, is that nothing will undermine charitable giving more than the permanent repeal of the estate tax.
As the Wall Street Journal reported, filmmaker George Lukas and Oracle CEO Larry Ellison joined 38 other billionaires heeded the call of Bill Gates and Warren Buffett to promise to donate at least half their wealth to charity:
On Wednesday, the trio will announce that 40 of America's wealthiest individuals and families, from Microsoft Corp.(MSFT) co-founder Paul G. Allen to hotel mogul Barron Hilton have signed on to the "Giving Pledge," an invitation Buffett and the Gates' extended in June for America's wealthiest families to publicly commit to giving away at least half of their wealth to charity within their lifetimes or after their deaths. The pledge stemmed from a series of dinners the two men held for the nation's billionaires over the past year to discuss the effects of the recession on philanthropy.
Backed by New York City Mayor Michael Bloomberg and Oprah Winfrey among others, Gates and Buffett two months ago called on the super-rich, "starting with the Forbes list of the 400 wealthiest Americans, to pledge -- literally pledge -- at least 50% of their net worth to charity during their lifetimes or at death." Given the $1.2 trillion net worth of that select group, as Fortune noted, over time the Giving Pledge could mean a $600 billion infusion into American charities. In their statement, Gates and Buffett declared:
"The pledge is a moral commitment to give, not a legal contract. It does not involve pooling money or supporting a particular set of causes or organizations."
For his part, Warren Buffett has also long insisted that the rich and famous have another moral responsibility. During a press conference four years ago, Buffett offered a strong progressive argument in support of the estate tax:
"I would hate to see the estate tax gutted. It's in keeping with the idea of equality of opportunity in this country, not giving incredible head starts to certain people who were very selective about the womb from which they emerged.
I'm not an enthusiast for dynastic wealth when there are 6 billion people who have much poorer lives. I can't think of anything that's more counter to a democracy that dynastic wealth. The idea that you win the lottery the moment you're born: It just strikes me as outrageous."
Truer words were never spoken. After all, as the GOP led by Arizona Senator Jon Kyl (and aided and abetted by malleable Democrats like Blanche Lincoln) is trying to do in - or at dilute - the so-called "death tax." And that would not only cost the U.S. Treasury billions of dollars each year; it would gut charitable giving in the United States.
In 2009, only 1 in 500 American estates paid taxes. But barring new legislation in Congress, in 2011 the estate tax rate will jump back up to its pre-2001 level of 55%, starting at $2 million per couple. In December, the House voted 225-200 to maintain 2009's rate of 45% beginning at $3.5 million per person or $7 million per couple. But in December 2009, Jon Kyl led the successful GOP effort to block the bill, ensuring the temporary expiration of the estate tax on January 1st:
"It's a problem that doesn't have to exist if they'll just leave the existing law alone and let the rate go to zero, which is where everyone wants it to be."
Not quite everyone. As the data make clear, America's churches, non-profits, foundations and charities stand to lose billions if the Republicans succeed.
In 2003, the nonpartisan Tax Policy Center documented the hemorrhaging that would ensue. As the TPC described, "The estate tax encourages charitable giving at death by allowing a deduction for charitable bequests" and "also encourages giving during life." Its repeal would be devastating for U.S. charities:
We find that estate tax repeal would reduce charitable bequests by between 22 and 37 percent, or between $3.6 billion and $6 billion per year. Previous studies are consistent with this finding, and also imply that repeal would reduce giving during life by a similar magnitude in dollar terms. To put this in perspective, a reduction in annual charitable donations in life and at death of $10 billion due to estate tax repeal implies that, each year, the nonprofit sector would lose resources equivalent to the total grants currently made by the largest 110 foundations in the United States.1 The qualitative conclusion that repeal would significantly reduce giving holds even if repeal raises aggregate pre-tax wealth and income by plausible amounts.
That finding was echoed the next year by the Congressional Budget Office (CBO). Ironically, its director then was Douglas Holtz-Eakin, who later served as the chief economic advisor to Republcian presidential candidate John McCain. (Even more ironic, McCain called for the repeal of the estate tax in 2008, despite two years earlier having proclaimed "most great civilized countries have an income tax and an inheritance tax" and "in my judgment both should be part of our system of federal taxation.") As CBO director Holtz-Eakin wrote in "The Estate Tax and Charitable Giving":
Furthermore, the estate tax provides an incentive to make charitable contributions during life. The paper finds that increasing the amount exempted from the estate tax from $675,000 to either $2 million or $3.5 million would reduce charitable giving by less than 3 percent. However, repealing the tax would have a larger impact, decreasing donations to charity by 6 percent to 12 percent.
In 2006, the Center on Budget and Policy Priorities (CBPP) provided a sobering assessment of what proposed estate tax reforms would do to philanthropy among the wealthiest Americans. Whether the estate tax was repealed outright, the size of the exempted assets raised or the tax rate itself dropped, American charities would suffer painful losses of funding:
- CBO estimated that, had the estate tax not existed in 2000, charitable donations would have been $13 billion to $25 billion lower that year. CBO found that repealing the estate tax would have reduced charitable bequests by 16 to 28 percent and charitable giving during life by 6 to 11 percent.
- The amount by which CBO found that charitable donations would have fallen in 2000 exceeds the total amount of corporate charitable donations in the United States in that year (which equaled $11 billion) and approaches the total amount that foundations contributed to charitable causes ($25 billion).
- A study by Brookings Institution economists Jon Bakija and William Gale found effects of similar magnitude, as have analyses by various other researchers.
Last year, President Obama proposed raising $318 billion over the next decade by trimming wealthier taxpayers' deductions for charitable giving to 28% from its current 35%. Predictably, Republicans (joined by some Democrats) forecast an apocalypse for donations to charities. As John Boehner ominously (and wrongly) warned, "It will also deliver a sharp blow to charities at a time when they are hurting during the economic downturn." But as Bloomberg and The Chronicle of Philanthropy each reported, Obama's proposal for 2011 would likely have little to no impact on charitable giving. As Bloomberg noted:
Not necessarily, say tax and philanthropy experts. They say altruistic or religious motives outweigh tax-shelter considerations among such donors, and cite previous limitations placed on deductions for high earners that they say haven't hurt donations.
Among those previous limitations, as former OMB director Peter Orszag among others recalled, was the same upper income 28% deduction during Ronald Reagan's first term. As Orszag told reporters in February 2009, the record shows that "what drives charitable contributions is overall economic growth."
But one provision of the tax code - the estate tax - does have huge impact on charitable contributions. As Warren Buffett implored his fellow members of the gilded class, they should be giving more to charity both during their lifetimes and when they leave their legacies. And the estate tax is crucial to encouraging them to do both.