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Save American Charities. Restore the Estate Tax.

October 28, 2010

Last week, Americans learned that the nation's biggest charities suffered a staggering 11% drop in donations last year. That decline in contributions to the 400 largest charitable organizations was the worst in two decades. More than anything else, American charities hoping to refill their coffers need a return to robust economic growth. That, and one other thing. As study after study shows, no policy change will undermine charitable giving more than the permanent repeal of the estate tax.
The Chronicle of Philanthropy delivered the grim news from the likes of the United Way, the American Cancer Society, the Y, the Salvation Army and dozens of others:

The 400 institutions in the survey raised $68.6-billion in 2009. The drop they suffered in contributions was nearly four times as great as the next biggest annual decrease: 2.8 percent in 2001, when charities also struggled to raise money from recession-battered donors.

For 2010, the picture is slightly brighter. Still, by the end of this year, among those non-profits providing forecasts, "they predicted was an increase of just 1.4 percent."
Writing in the Washington Post, Ezra Klein explained one of the implications for policy makers. "Charity is counter-cyclical," he pointed out, adding, "When the economy is booming and there's less need, there's also more capacity. When the [economy] is worse and there's more need, donations dry up and there's less capacity." That's why, Klein suggested, "we need a robust, federal safety net that's immune -- in a way state-funded programs like Medicaid are not -- from the ravages of the business cycle."
But there's one simple step Congress can take right now that would not only provide help to American charities starting next year, but add billions in revenue to the United States Treasury as well: restore the estate tax.

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, Arizona Republican Senator 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."
And, of course, the altruism of givers. While the tax-free deaths this year of George Steinbrenner, Dan Duncan and other members of the gilded class have drawn attention to the temporary lapse of the estate tax, Bill Gates, Warren Buffett and 40 other billionaires pledged to donate at least half their wealth to charity. 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. But at a time of record income inequality and the return of upper class opulence, the would-be Republican majority is instead promising to kill 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.

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Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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