Jerry Wisotsky was one of the most generous people I have known. He founded a small printing business in Arizona in 1959 that ultimately grew to employ about 200 people. Jerry was renowned in the state for the many contributions he made and the extensive fund raising he did for charities. He was a leader of the Phoenix Boys and Girls Clubs, the Valley of the Sun United Way, and St. Luke’s Hospital. Jerry’s name was synonymous with charitable giving.
After he died in 1993, his family had to sell the printing business because of the estate tax owed on it. The out-of-state firm that bought out the Wisotskys no longer contributes to charitable causes in Arizona as Jerry once did. Without the family business, his family hasn’t been able to contribute as much, either.
Jerry didn’t need a hammer in the tax code to force him to give to worthy causes. He was a good man with a heart of gold, and there are millions like him around the country.
The fact is, the bulk of charitable gifts are made by people who don’t get any tax benefit from their gifts. Only those who itemize their deductions on their tax returns may deduct charitable contributions, and estimates are that only about 30 percent of taxpayers itemize.
In fact, according to Giving USA, gifts made at death accounted for only about 8 percent of the $190.2 billion in charitable giving in 1999.
A study for the National Bureau of Economic Research and the Brookings Institution found that the federal estate tax probably has a greater effect on the timing of charitable gifts than the total amount of lifetime giving. Eliminate the estate tax and the wealthy might give more during their lifetimes and less at death, but not necessarily less overall.
If the tax code is to be used to encourage charitable giving, there are better ways to go about it than to impose a punitive tax at death. The Death Tax Elimination Act, which Congress passed last session and which President Clinton subsequently vetoed, would have replaced the estate tax with a capital-gains tax, where unrealized gains in assets held until death would be taxed when the inherited property is sold.
The idea is to make death a tax-neutral event. Death would neither result in the imposition of a punitive tax nor confer the benefit of an unlimited step-up in basis. Beneficiaries of an estate would inherit assets and the decedent’s tax basis in that property. (A limited step-up in basis would be preserved to ensure that small estates bear no new tax liability.)
This approach eliminates the unfairness of the death tax and still creates a positive incentive to give. Because individuals would inherit property with the decedent’s tax basis, they would face a choice: sell the property and be subject to a large capital-gains tax because of the inherited tax basis or donate the property to charity and get a tax deduction for its full, fair market value.
Tax policy might encourage some additional charitable giving, but it probably has much less influence than personal income and wealth—a finding confirmed by research by William Randolph, an economist for the Congressional Budget Office. Eliminate the estate tax—and the need for expensive estate-tax planning—and people will have more to give.
Eliminate the estate tax, and the economy will also grow larger. A December 1998 report by the Joint Economic Committee estimated that repeal would lead to the creation of 240,000 jobs over seven years and leave Americans with an additional $24.4 billion in disposable personal income. More income and wealth mean more giving.
Ultimately, though, charity is about promoting opportunity in our society. In the five years that I’ve led the effort in the Senate to repeal the death tax, I can’t think of a single charity that has contacted me to express concern about what my repeal bill would do to its fund raising. I suspect no charity or its donors would really support a tax that is so anathema to the charitable spirit.
The estate tax is an unfair tax. It threatens the American dream. The American people agree. A Gallup poll this summer found that 60 percent of the people support repeal, even though about three-quarters of those supporters do not think they will ever have to pay a death tax themselves. A subsequent Zogby poll found support for repeal at 75 percent.
It’s time to put the death tax to its well-deserved rest.
Senator Jon Kyl, Republican of Arizona, is a member of the Senate Finance Committee and author of bipartisan legislation to end the estate tax.