Congress has enacted legislation that would wipe out federal estate taxes for one year—2010—and debate is heating up about whether to extend this repeal or to restore the estate tax, perhaps in modified form. A number of highly respected voices in the philanthropic world, including Independent Sector and William S. Gates Sr., father of the Microsoft founder, argue that the abolition of estate taxes would cause serious harm to charitable giving.
We hold a different view at The Philanthropy Roundtable. We hold that the repeal of the estate tax may affect the form and timing of charitable giving. But it is not likely to affect the magnitude of overall philanthropy.
The remarkable tradition of American philanthropy long antedates the establishment of the federal estate tax in 1916. Stanford University, the Chicago Symphony Orchestra, St. Patrick’s Cathedral, and the American Red Cross are just some of the thousands of institutions that owe their origins to private philanthropy in the days before tax incentives for charitable giving.
For the last several decades, despite a variety of tax policies, overall charitable giving has remained fairly constant at about 2 percent of national income. This strongly suggests that charitable giving is best increased not by any specific tax incentive but rather by boosting economic growth.
Gift and estate taxes do create an incentive for giving on one’s deathbed, so with the repeal of death taxes it is possible that the 7.5 percent of charitable giving represented by bequests might decline. Repeal might also reduce the use of instruments such as charitable lead trusts, charitable remainder trusts, and charitable gift annuities which offer tax advantages in transferring assets to younger generations.
But the primary motivation for intelligent philanthropy—the desire to help cherished institutions, to assist the needy, to cure diseases, to expand opportunity, to reform culture and politics—will not disappear with repeal of the estate tax. The most effective philanthropy on one’s deathbed builds on the knowledge and habits gained from a lifetime of giving, and this wisdom will not be affected by changes in the estate tax.
Conversely, all too many donors today make hasty charitable decisions late in life for no other reason than to reduce their estate tax. Philanthropy with this rationale is usually sloppy and thoughtless, and if repeal of the estate tax leads to less of it, its departure will not be missed.
While repeal of the estate tax will reduce incentives for some types of charitable giving, it will also offer positive offsetting benefits. Repeal will make it easier for families to accumulate the wealth that makes philanthropy possible. It will reduce the diversion of resources into tax-avoidance schemes and attorneys’ fees, both of which can hinder economic growth. Repeal will also encourage more giving by donors during their lifetime, rather than having it carried out by others after their death.
The past year has provided ample evidence that the vitality of the market economy is more important than any specific tax incentive for the vitality of philanthropy. The dramatic runup in stock market values—at this writing, prices have risen by about 20 percent during 2003—will do more to increase foundation giving, both by existing foundations and by new foundations yet to be created, than would any change in the regulations governing payout rates lately contemplated by Congress.
So, too, the vitality of planned giving will be determined less by specific tax laws than by the number and magnitude of estates, and by the ability of nonprofit institutions to capture the philanthropic imaginations and affections of donors.
The case for and against estate taxes should be made on other grounds than their influence on philanthropy. The central question to be debated is whether it is just and good for parents to be able to pass on their homes, their businesses, their farms, and their other property to their children, whether inheritance is compatible with a free society and our ideals as a nation. If the answer is yes, estate taxes should be abolished or at least limited. If it is no, they should be retained or perhaps strengthened. In either case, philanthropy has the opportunity to flourish.
Adam Meyerson is president of The Philanthropy Roundtable.